Australia's central bank today left interest rates steady at 3 per cent as expected and surprised some by saying this record low level was right for the time being, countering talk of an imminent tightening.
The local dollar slipped and bill futures rallied as investors scaled back the chance of the Reserve Bank of Australia (RBA) moving as early as October.
"It sounds like the RBA doesn't want to bang the drum about rate hikes," said Rory Robertson, interest rate strategist at Macquarie. "This is a much less hawkish statement than the markets had anticipated."
Based on overnight indexed swaps, the market saw only a one in five chance of a move in October, but was still fully priced for rates of at least 3.25 per cent by year-end.
"The RBA is reasonably upbeat, both about the global and the Australian economies and, in particular, about China," noted Su-Lin Ong, a senior economist at RBC Capital Markets.
"All in all, this is not consistent with a cash rate of 3 per cent, which clearly is an emergency setting."
Last month, RBA Governor Glenn Stevens noted he had cut rates so low in anticipation of an economic rout that never happened, so it was likely rates would have to rise at some stage.
In a brief statement after today's monthly policy meeting, Mr Stevens emphasised that the domestic economy had been surprisingly strong and highlighted the improved outlook for business investment.
"It now appears that investment may not be as weak over the year ahead as earlier expected," said Mr Stevens.
Home construction was picking up and, combined with fiscal pump priming, should see the economy firm into 2010. That, in turn, meant that inflation might not fall as first thought.
"The RBA has upgraded their medium-term view a notch, but certainly not enough to suggest that they will pull the trigger on rates in October," said Spiros Papadopoulos, an economist at National Australia Bank.
"Today's statement was about reaffirming that the next move is up, but not until a durable recovery is seen."
The RBA may have had a wary eye on the government's report on gross domestic product (GDP) for the second quarter, due tomorrow.
Reuters