RBA surprises by holding rates, Australian dollar rises

The Reserve Bank of Australia left the official cash target rate unchanged at Tuesday's review, surprising markets which had been expecting a 25 basis points reduction and sending the Aussie dollar higher.

The RBA decided to leave the cash rate at 2.25% saying further easing may be needed later. The minutes of the last RBA meeting had indicated that the next could be by the end of this year but analysts expected a front loading of easing given then disappointing GDP and labour market data.

"The Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being," said RBA governor Glenn Stevens.

"Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings," Stevens said.

AUD/USD jumped to 0.7840 after the policy announcement from near 0.7770 prior. The pair had ended Monday at 0.7768.

The Aussie dollar had touched a multi-year low of 0.7626 on 3 February when the central bank surprised with a 25 basis points cut in the main rate, taking it to a record low.

Against the New Zealand dollar, AUD jumped to 1.0380 from 1.0330 following the decision. EUR/AUD slumped to 1.4275 from 1.4405 and AUD/JPY jumped to 93.80 from near 93.20.

Poll forecasts for the March meeting indicated the likelihood of another cut given the disinflation trend and downside risks to Australian growth.

The RBA kept its usual comments about the below-trend pace of economic growth and still strong Aussie against a basket of currencies despite the recent losses against the greenback in the policy statement on Tuesday.

"The Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy."