RBA leaves interest rates unchanged

Bloomberg reports the highly unexpected decision by the RBA on Tuesday.

Australia’s central bank unexpectedly paused in raising interest rates as Governor Glenn Stevens opted to support the economy’s acceleration and stem inflation later.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

However, this is unlikely to signal the end of the rate hike cycle.

As information about the impact of the bank’s previous increases “is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being,” Stevens said in a statement today.

Borrowing costs will be “adjusted further” to keep inflation within the central bank’s target range of 2 percent to 3 percent “if economic conditions evolve broadly as expected,” he said. Inflation should remain within the target this year, he said.

Already, though, economic growth may be moderating.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8.

And the RBA will, no doubt, be keeping one eye on the housing market.

Borrowing for home buying fell to a five-year low last month, according to a report yesterday by Australian Finance Group Ltd., which says it accounts for more than 10 percent of the mortgage market. The group arranged A$1.55 billion of mortgages in January, 19 percent less than a year earlier and the lowest level for any month since 2005.

Reports today add weight to the view that a pause in the tightening cycle is warranted.

Bloomberg reports that Australia's services industry shrank in January.

Australia’s services industry shrank in January for the first time in four months, a sign last quarter’s record central bank interest-rate increases are slowing demand.

The performance of services index fell 2.6 points to 47.4 from December, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. A figure below 50 indicates the industry is shrinking.

And Fitch Ratings sees a rise in mortgage defaults this year. Again from Bloomberg:

Rising interest rates will trigger defaults on Australian home loans and commercial mortgages, causing deterioration in the quality of assets underpinning mortgage-backed bonds, according to Fitch Ratings.

Three straight interest rate rises last year and further increases expected in 2010 may cause Fitch’s Dinkum Index, which measures delinquency rates on prime home loans, to climb to as much as 1.5 percent this year from 1.21 percent at Sept. 30, the London-based risk assessor said in a report today.

The RBA will undoubtedly be loath to repeat the experience of the US, where the housing market has yet to recover, notwithstanding a 1.0 percent rise in pending home sales in December.