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Australian central bank keeps interest rates unchanged

Australia's central bank ignored inflationary jitters to leave interest rates unchanged at 6.25 percent yesterday, ending speculation of a hike before this year's election, economists said.

The decision by the board of the Reserve Bank of Australia not to lift rates was in line with market expectations after data released on Tuesday showing weaker-than-expected retail trade and building approvals.

The decision indicates that the bank feels it still has time to act by increasing rates if it feels that inflationary pressure reaches a critical level, analysts said.

They said rates now appeared set to remain on hold until early next year, meaning the government would not face a politically sensitive rate hike in the lead up to national elections due before the end of the year.

ANZ head of Australian economics Tony Pearson said that fears of inflation meant there was a medium-term bias towards higher rates but no action was imminent.

"We continue to believe there will be an increase in interest rates shortly after the Federal election," Pearson said.

"The most likely month is February, following the release of the December quarter inflation data," he said.

The next reading on inflation pressures in the economy will be revealed in consumer price index (CPI) figures for the June quarter to be released by the Australian Bureau of Statistics on July 25.

Reserve Bank Chairman Glenn Stevens said last month that inflation was likely to rise next year although current conditions allowed it to "err on the cautious side in setting policy."

CommSec chief equities economist Craig James said the central bank, while independent, would have needed a compelling case to lift rates in an election year.

"On current indications that justification is going to be hard to find," he said.

"Inflation is more likely to fall rather than rise in coming months, housing construction remains weak and there is still no sign of wage pressures on the horizon," he said.

The bank's decision to leave interest rates on hold followed three rate hikes last year -- the last one in November -- aimed at dampening inflation.

In the first quarter of this year, Australia's headline CPI rose 2.4 percent year-on-year, slower than the 3.3 percent gain in the fourth quarter of last year.

The bank in May cut its inflation forecast. It said then that it expected underlying inflation to fall back to about 2.5 percent within the year, down from 2.75 percent over the year to March this year.

The bank has an overall inflation target of 2 percent to 3 percent.
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