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Australia leaves interest rate at 3.75 percent

February 02, 2010 | The Associated Press

SYDNEY (AP) -- Australia's central bank left its key interest rate unchanged at 3.75 percent on Tuesday, surprising investors and analysts who had predicted the bank would continue raising the rate as the nation's economy rebounds.

The Reserve Bank of Australia was widely expected to lift the rate by a quarter percentage point for the fourth meeting in a row. In October, Australia became the first major economy to raise interest rates since the onset of the global financial crisis, hiking its key rate by a quarter point from a 50-year low.

The Australian dollar slid to $0.8788 from $0.8912 in New York late Monday. Stocks rallied with the benchmark index rising 1.6 percent by late afternoon.

In a statement, Gov. Glenn Stevens said the central bank left the rate unchanged because the effects of the previous rate hikes are still unclear.

Most commercial lenders have raised their rates to slightly higher than the bank's benchmark rate, he said.

Australia has pulled through the global economic slump better than most, thanks to 42 billion Australian dollars ($37 billion) of government stimulus spending and demand for the iron ore and other minerals that Australia exports to Asian nations including China, Japan and South Korea.

Before the central bank decision was announced, Prime Minister Kevin Rudd acknowledged a rate rise would stress family budgets, and urged banks to keep their interest rate increases in line with the benchmark cash rate.

"Let's face facts -- any increase in interest rates has an effect and hurts working families. That's the truth of it," Rudd told Australia's Nine Network.

Craig James, a senior economist at Commonwealth Bank of Australia, said it's clear the bank wants time to assess the consequences of its previous three hikes.

"It's a very strategic decision, so certainly nobody can accuse it of wrong judgment here," James said. "There's no rush for us to be lifting rates any higher. The economy is in good shape but it's not overheating."

James predicted the bank will continue raising the rate in the coming months until it reaches 4.75 percent by the end of the year.

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