Australia defies markets and holds rates Australia's central bank defied market expectations on Tuesday and kept interest rates on hold at 4.25 per cent, partly because of signs of improvement in the global economy. The Reserve Bank of Australia had been widely expected to lower its official cash rate by 0.25 per cent at its first meeting of 2012 in response to slowing activity in parts of the economy and a steady stream of job losses in industries such as banking and manufacturing. IN Global Economy Employment growth in Australia stalled last year while figures released on Monday showed retail sales had fallen in December, the first time in six months, as nervous consumers spent less on food and eating out. But in a statement Governor Glenn Stevens said interest rates for borrowers were now close to their medium term average following interest rate cuts in November and December. "With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment," said Mr Stevens. However, he left the door open to further easing. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation," he said. The RBA's surprise decision saw the Australian dollar rise to a six month high of $1.0790 against the US dollar, a move that will place further pressure on the country's tourism and automotive industries. Since the RBA's board last met in December, Mr Stevens said actions taken by the European Central Bank had relieved the pressure on Europe's banks and financial market sentiment, while remaining skittish, had improved. He also noted the recent improvement in US economic data and observed that while growth in China had moderated, as intended, it remained "quite robust" in the second half of 2012. "Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made," said the statement. Paul Bloxham, HSBC's chief economist for Australia and New Zealand, said the RBA had taken the view that it could afford to keep its powder dry because conditions in global financial markets had stabilised. As is so often the case, the future path for Australian monetary policy will mostly be driven by the global outlook. As we still deem that there are still significant challenges ahead for the global economy, we are still of the view that the cash rate will need to be cut further. Mr Stevens said the RBA expected inflation to be within its targeted range of 2-3 per cent over the next couple of years, excluding the impact of Australia's new carbon tax.