Australia's central bank shocked markets by skipping an interest rate rise yesterday, citing the impact of higher mortgage rates at home while noting tighter policy in China and concerns over sovereign debt abroad.
The Reserve Bank of Australia's (RBA) decision to keep its key cash rate at 3.75 per cent confounded expectations of a rise to four per cent and hammered the local currency as investors slashed estimates for how high rates might go this year.
Yet, RBA Governor Glenn Stevens also emphasised that, should the domestic economy continue to improve as expected, then further hikes would likely be needed over time.
"This is a pause, not a stop," said Peter Jolly, head of research at National Australia Bank. "It's just that they paused earlier than most thought. I do not think they have radically changed their view."
"We still think they need to lift rates again and we see rates at 4.75 per cent by the year end."
The market was badly caught out, however, having almost fully priced in a hike at yesterday's policy meeting. As a result, the Australian dollar sank more than a cent to $0.8800 while a firmer US dollar pressured oil and metals prices lower.
One-year swap rates fell 23.25 basis points.
Investors now doubted if the RBA would move in March either, with futures pricing in about 35 per cent chance of a rise. Expectations for the next 12 months were pared back to show about 80 basis points of tightening, compared to 105 basis points before the announcement.
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