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Australia's key cash rate stays at 3%

AUSTRALIA'S central bank kept the key cash rate at a record low of 3 percent yesterday and emphasized that easing inflation meant there was scope to cut further if needed.

The decision by the Reserve Bank of Australia was widely expected given gains in global financial markets and signs of economic stabilization at home.

Indeed, trade data released yesterday suggested Australia just might have dodged recession last quarter.

Still, the explicit reiteration of an easing bias after the central bank's monthly policy meeting was a surprise, and perhaps an attempt to restrain the market from pricing in a tightening too soon.

"The statement probably is a little more dovish than some anticipated, with the RBA keeping the option of further rate cuts on the table," said Scott Haslem, chief economist at UBS in Sydney. "We continue to expect further modest cuts from the RBA over the course of this year, though with upside risks.

"We continue to expect further modest cuts from the RBA over the course of this year, though with upside risks," Haslem said.

The central bank has already slashed rates by 4.25 percentage points since September.

Investors reacted by paring losses in bill futures, though they still show only a slim chance of even a small cut for the rest of this year.

The Australian dollar held near eight-month highs of 81 US cents, underpinned by domestic interest rates that are among the highest in the developed world. Rates in the United States and Japan are near zero and only a little higher in Britain and Canada.

That rate premium is one reason the Australian dollar climbed almost 11 percent in May, the biggest monthly gain since 1982.

In a short statement on yesterday's decision, RBA Governor Glenn Stevens said the full effect of past stimulus had yet to be felt and noted they were already increasing demand for homes.

Government figures yesterday showed approvals to build new homes climbed 5.1 percent in April.


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