Australian rate surprise hits currency, lifts kiwi

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Australia's Reserve Bank unexpectedly left its benchmark interest rate unchanged for a fifth straight month, triggering the biggest drop in the local dollar in almost two months amid signs of cooling domestic demand.

Reserve Bank Governor Glenn Stevens yesterday kept the official cash rate target at 4.5 per cent.

Stevens said that higher borrowing costs would likely be needed in future.

"The board regards this as appropriate for the time being.

"If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target."

Evidence is mounting that households, which account for more than half the Australian economy, are spending less after policy makers embarked on the most aggressive round of interest rate increases by a Group of 20 member. Retail sales growth slowed in August to the weakest pace in six months and job advertisements in newspapers and on the internet gained in September by the smallest amount since April, surveys yesterday showed.

"Sanity has prevailed," said Roland Randall, an economist at TD Securities in Singapore who correctly forecast the decision.

"We have soft credit growth and inflation clearly running around the upper half of their band but not uncomfortable as yet."

The Australian dollar dropped more than US1c to US95.74c last night.

The decision gave the New Zealand dollar a boost.

The kiwi was at A77.10c not long after the RBA decision, up from Monday's A76.65c.

Meanwhile, the Bank of Japan yesterday lowered its benchmark interest rate to a range of 0 per cent to 0.1 per cent from a target of 0.1 per cent previously.

The central bank had not changed the overnight call rate target since December 2008, when it set the rate at 0.1 per cent.

The decision underscores growing worries about the Japanese economy, which is being battered by a strong yen and persistent deflation.

- Agencies