RBA Tightens, BoC Stands Pat by Korman Tam

Central bank decisions dominated the headlines in the Tuesday session, as the results of the policy deliberations were largely in line with consensus expectations. The Reserve Bank of Australia tightened monetary policy, raising interest rates by 25-basis points to 4.0% while the Bank of Canada kept policy unchanged at 0.25%.

In the accompanying statement, RBA Governor Stevens said “interest rates to most borrowers remain lower than average” and given Australia’s “growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average”. The Australian dollar was initially softer following the policy announcement, sliding to 0.8956 in a knee-jerk reaction, but has since recovered above the 0.90-figure to extend gains toward 0.9056.

The Bank of Canada held policy unchanged at 0.25%, as expected. The BoC reiterated its “commitment to hold current policy rate until the end of the second quarter of 2010”. The Bank acknowledged yesterday’s robust GDP report of 5% -- saying “the level of economic activity in Canada has been slightly higher than the Bank had projected in its January MPR” and attributing the growth rate to vigorous domestic spending and further recovery in exports. The BoC added that “the main macroeconomic risks to the inflation projection are roughly balanced”. Further, the Bank tempered expectations for policy tightening saying “the persistent strength of the Canadian dollar and the low absolute level of US demand continue to act as significant drags on economic activity in Canada”. Traders bid the Loonie higher against the greenback, touching 1.0311 in the morning session