Australia's central bank held its cash rate steady at 2.25 per cent for a second month on Tuesday, a surprise to some investors who had looked for a cut given recent steep declines in the price of iron ore.

The currency climbed three quarters of a U.S. cent after the Reserve Bank of Australia (RBA) skipped on an easing, though it did leave the door open to a move in coming months.

Markets had priced in more than a 60 per cent chance of an easing this week given further falls in prices of key commodity exports and a general reluctance by businesses to invest more.

Key points

Commentary

Jasmin Argyrou, Senior investment manager, Aberdeen Asset Management

"The RBA's decision to leave rates on hold again may reflect its concerns that low interest rates are having a more uncertain influence on spending decisions. A weaker AUD will be more effective for the economy but low commodity prices may not lead to enough currency depreciation; eventually the cash rate will need to be lowered further."

Michael Workman, Senior Economist, Commonwealth Bank

"The statement was pretty similar to last month's and again indicating that another interest rate cut will occur, possibly next month. Growth is not up to scratch and investment on the business side is falling, which is not what they want. Therefore we will get lower rates.

"If they get what they want on the currency side, which is something closer to 70 cents, then it looks unlikely we'll go below 2 percent. The market is pretty keen on a number around 1.75 percent, maybe a little bit lower later this year. I suppose it does depend on where the unemployemnt peaks and at this stage it looks pretty close to a peak at least from our perspective."

Spiros Papadopoulos, Senior Economist, NAB

"We expected they'd remain on hold so it's not surprising they haven't made a lot of change to the media statement, and we're still expecting they'll be cutting rates next month.

"Obviously they want to see a few more signs that another cut is justified, but from where we see it, it's all pointing towards the economy needing another cut and we're expecting that will happen in May."

Su-Lin Ong, Senior Economist, EBC Capital Markets

"It was a close call. They want to see how the February cut is working its way through the economy and probably would prefer to wait for more information like inflation. The easing bias is still clear. Overall, the hurdle to cut was a bit higher than the market thinks. The 25 per cent drop in iron ore in the last month has not been enough to push them at this point in time, but ultimately it will. The drop in the terms and trade and the implications for national income and growth will see some further easing.

We have a cut for May. The key development is that weaker commodity prices, lower terms of trade, a somewhat sticky currency will push them over the line in May."

Market Reaction

The Australian dollar jumped to $0.7670 after the policy announcement, from around $0.7608. Interbank futures <0#YIB:> fell sharply as the market had been wagering on a cut this week. Investors also pared the chances of an easing in May.

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