FX.co ★ Australia Keeps Rate Unchanged As Expected

Australia's central bank kept its key interest rate unchanged at a record low, as widely expected, and signaled a hawkish stance going forward.

The policy board of the Reserve Bank of Australia headed by Governor Philip Lowe decided to maintain its cash rate target at 0.10 percent.

The bank no longer says it is prepared to be 'patient'. The board noted that inflation has picked up and a further increase is expected, but growth in labor costs has been below rates that are likely to be consistent with inflation being sustainably at target.

Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labor costs, Lowe said in the statement.

The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target, the governor added.

"While today's policy statement wasn't outright hawkish, the RBA's dovishness is waning and we're confident in our forecast that the Bank will start to lift interest rates in June," Marcel Thieliant, an economist at Capital Economics, said. The economist expects a rise in the cash rate to 1.75 percent by the middle of next year.

According to RBA, higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters. The main sources of uncertainty relate to the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labor costs.

Given the tightness of the labor market, a further pick-up in aggregate wages growth and broader measures of labor costs is in prospect, the board observed. This pick-up is still expected to be only gradual, although there is uncertainty about the behavior of labor costs at historically low levels of unemployment.