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Published: Tuesday February 7, 2012 MYT 12:16:00 PM

Australia central bank holds rates


SYDNEY, Feb 7 (Reuters) Australia's central bank held its cash rate steady at 4.25 percent on Tuesday, a surprise to many who had thought it would cut rates, though it did leave the door open to an easing in coming months if the economy weakened.

The Australian dollar jumped a cent to sixmonth peak of $1.0812 after the Reserve Bank of Australia (RBA) confounded market expectations for a cut to 4.0 percent.

"With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment," wrote RBA Governor Glenn Stevens in a brief statement.

"Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."

The RBA cut by a quarter point in both November and December as domestic inflation proved surprisingly tame, a major turnaround from as recently as August when the central bank actually considered tightening.

The improved outlook for inflation meant the RBA had room to take out insurance against global uncertainties caused by the debt crisis in Europe.

On Tuesday, Stevens said acute financial pressures on banks in Europe had been alleviated considerably late in 2011 by the actions of policymakers.

He noted recent data from the United States suggested a continuing moderate expansion after a soft patch in mid 2011.

Growth in China had moderated but on most indicators remained quite robust through the second half of last year, Stevens added. China is Australia's biggest export market and its health is a major preoccupation for the central bank.

Australian rates remain well above those of many other developed nations reflecting the relative strength of the resourcerich country.

Investors pared back expectations of any further easing following Tuesday's decision, with interbank futures now implying a 5050 chance of a cut to 4 percent in March compared to a 100 percent probability previously.

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