Australia's CB stuns markets by passing up chance to cut rates

Australia’s central bank on Tuesday left its cash rate steady at 3.85 per cent, a shock for markets that had confidently wagered on a cut, saying the majority of the board wanted to wait for more information to confirm inflation was slowing.

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Traders were quick to send the Australian dollar racing up 0.8 per cent to $0.6543, while three-year bond futures extended earlier losses and fell IO ticks to 96.60.

The swift moves in markets imply around an 88 per cent chance the cash rate would be cut to 3.60 per cent at its Aug. 12 meeting, and now favours rates bottoming at 3.10 per cent rather than 2.85 per cent.

Wrapping up a two-day policy meeting, the Reserve Bank of Australia said it remained cautious about the inflation outlook, adding that six members had voted to hold rates steady while three voted against, a rare split decision for the board.

Markets had been almost fully priced for an easing to 3.60 per cent this week given core inflation had slowed to the midpoint of the RBA’s 2 per cent to 3 per cent target range and consumer spending was proving weaker than expected.

“The Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis,” the board said in a statement.