Australia's central bank kept interest rates unchanged at 4.75% today - in line with expectations. The bank said a strong local currency was likely to help keep a check on inflationary pressures.
The Reserve Bank of Australia last hiked the cash rate in November 2010 in a pre-emptive move against inflation amid the threat of rising commodity prices and a tightening labour market.
While there were some factors boosting inflation, including the prices of flood-affected agricultural products, the bank said they were being offset by the higher local dollar, which is at record highs against the greenback.
'At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook,' said Reserve Bank of Australia governor Glenn Stevens.
'Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008. These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices,' he added.
The 'Aussie' breached parity with the US dollar as it benefited from the country's huge commodities-led boom and yesterday it hit a record $1.0417, which officials said would temper inflation - currently sitting at 2.7%.
While production losses due to floods in Queensland in January were temporarily raising prices for some agricultural produce, which will boost the March quarter consumer price index, they should fall back, he added.
Treasurer Wayne Swan welcomed the decision to keep rates on hold, saying the natural disasters at home this year, along with the deadly earthquake and tsunami in Japan, will have a significant impact on the economy.
'There's no doubt our exports are taking a hit,' he said in a statement. 'Despite the challenges for our economy in the short-term, our fundamentals remain strong with low unemployment, a bumper investment pipeline and a budget on track for a rapid return to surplus,' he added.
Australia, the first major western economy to raise interest rates after the global slump, has hiked its cash rate by 175 basis points since October 2009 as it rides a mining boom driven by Asian demand, helping it dodge recession.
