Australia central bank sits tight, gives nod to global risk

By Wayne Cole

SYDNEY (Reuters) - Australia's central bank held interest rates steady on Tuesday even as wild swings in global markets, deepening unease over China's economy and a fresh outbreak of easing abroad suggests risks are for a further cut going forward.

The Reserve Bank of Australia (RBA) did leave the door open to a move after its first policy meeting of the year, saying that a background of subdued inflation meant there was scope for a reduction if needed to support the economy.

The Board specifically noted that coming data would allow it to better judge if turmoil in financial markets truly augured tougher times for the global economy, and whether recent strength in employment at home would prove long lasting.

Yet, it also saw reasons for optimism.

"The Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target," RBA Governor Glenn Stevens said in a brief statement.

"The available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in mining investment continued."

The steady outcome was no surprise given the RBA has repeatedly questioned whether lower rates would do much good, and might cause harm by inflating a bubble in home prices.

In a Reuters poll of 32 analysts, all had expected no change in the 2 percent cash rate this week which limited the reaction in markets to a slight dip in the local dollar.

The central bank last eased in May and has since shown a preference for further stimulus to come through a weaker currency. The Australian dollar pared early gains to be down slightly at $0.7080, but is hovering not far from 7-year lows.

MORE EASING, MAYBE

Investors still assume the global outlook argues for at least one more cut in rates, albeit not for a while. Interbank futures <0#YIB:> imply around an even chance of a move by May and are fully priced for 1.75 percent by October.

"Financial markets in early 2016 provide a strong reminder that Australia is a small and open economy, leveraged to the global commodity and growth cycle," says Su-Lin Ong, a senior economist at RBC Capital Markets.

"Accordingly, we remain with two further cuts in our profile for this year."

The Bank of Japan stunned markets last week by cutting rates to less than zero, and the head of the European Central Bank has all but promised further stimulus steps by March.

The resulting drop in the yen and euro, combined with feverish talk of a possible devaluation of the Chinese yuan, are pressuring other countries to keep policy loose so as to avoid a damaging appreciation in their own currencies.

Worries about the health of Chinese demand have also contributed to steep price falls for many of Australia's major commodity exports, hitting profits, wages and tax receipts.

The RBA's own index of commodity prices sank by a quarter in the year to January, when measured in U.S. dollar terms.

Domestic inflation would be no bar to action given it is running at the very bottom of the central bank's long-term target band of 2 to 3 percent.

(Editing by Jacqueline Wong)

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