Australian and Indian central banks stand pat on rates

Central banks in Australia and India took a break from monetary easing and held benchmark interest rates steady.

In the past two months the two central banks have sided with the growing flock of doves. In February the Reserve Bank of Australia cut interest rates by 25 basis points to a record low of 2.25 per cent, the first change in 18 months as it sought to tackle slowing inflation and economic growth.

In March, at an unscheduled meeting, the Reserve Bank of India lowered its policy interest rate by 25 basis points to 7.5 per cent citing a faster-than-expected reduction in inflationary pressures in the economy.

The move towards easing across much of Asia and Europe stands in contrast with the US Federal Reserve, which many economists expect could raise rates as early as June as the country's economy rebounds.

However, India's decision to stand pat reflects poor transmission with banks yet to reduce commercial lending rates following the two rate cuts undertaken earlier this year.

"Transmission of policy rates to lending rates has not taken place so far despite weak credit off-take and front-loading of two rate cuts," the Reserve Bank of India said in its statement.

"With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks of inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review."

The central bank added that upside risks to the projected trajectory of inflation remain, especially after rains damaged crops across north India and the possibility of a renewed rise in oil prices.

Markets had expected the RBI to pause. "The disinflation we'd seen in the last 12 months had opened room for interest rate cuts," said Sonal Varma, India economist for Nomura. "The RBI front-loaded the cuts to make use of that room, and their focus now is on banks transmitting their lower cost of funding by cutting their lending and deposit rates."

Similarly, most economists had expected the RBA to keep rates steady, though the swaps market had been pricing in a 70 per cent chance of a policy loosening on Tuesday. The Australian dollar shot up more than 1 per cent after the decision, reflecting surprise, to $0.7693.

The RBA "missed an opportunity to achieve the further weakening in the Australian dollar that it so badly craves", wrote Paul Dales, chief Australia and New Zealand economist at Capital Economics.

The central bank, however, said it remained open to further easing "in order to foster sustainable growth in demand and inflation consistent with the target".

Australia enjoyed impressive economic growth during a decade-long mining investment boom and has avoided recession for 24 years. But a sharp fall in the price of its two main exports - iron ore and coal - and a drop in mining investment has pushed growth below trend and left unemployment hovering close to decade highs.

Many central banks around the world are in a monetary easing cycle in a bid to spur economic growth. Countries whose central banks have cut benchmark rates since the beginning of the year include China, India, and Russia.

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