By Candice Zachariahs Feb. 2 (Bloomberg) -- The Australian dollar dropped and two-year government bonds rose after the central bank unexpectedly left borrowing costs unchanged, ending a record set of interest-rate increases. New Zealand’s currency also fell. The so-called Aussie declined to its weakest since Dec. 23 after Reserve Bank of Australia Governor Glenn Stevens’ decision to keep benchmark borrowing costs unchanged at 3.75 percent. Australian business confidence fell in December to the lowest in six months, a private report showed today, a sign the bank’s previous three straight increases are damping sentiment. The decision was “a major surprise for the market,” said Mansoor Mohi-uddin, Singapore-based chief currency strategist at UBS AG, Switzerland’s biggest bank. “We would expect further downside in the Australian dollar probably back down to the 85- cent level over the next one to three months.” Australia’s dollar slid as much as 1.5 percent, the biggest decline in almost two weeks, before trading at 88.05 U.S. cents as of 4:37 p.m. in Sydney, a 1.2 percent decline from 89.14 cents yesterday in New York. It touched 87.82 cents, the least since Dec. 23. The currency dropped 1 percent to 79.98 yen. New Zealand’s dollar declined 0.3 percent to 70.62 U.S. cents from 70.84 cents yesterday. It bought 64.13 yen from 64.19. Steady Setting As information about the impact of the bank’s previous rate increases “is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being,” Stevens said in a statement today. The central bank’s pause wasn’t forecast by any of the 20 economists in a Bloomberg News survey. “The decision will bring the currency back to a degree, but the reserve bank hasn’t gone away,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney. The statement signaled “it’s very unlikely they will be changing their growth or inflation forecasts,” when the bank releases its monetary policy statement on Feb. 5, he said. The bank will “likely” need to adjust its policy settings “over time” to keep inflation within its 2 percent to 3 percent target range, the RBA said in its statement. Benchmark interest rates are 3.75 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S. attracting investors to the South Pacific nations’ higher-yielding assets. Business Confidence An index measuring business confidence dropped 11 points to 8 in December, according to a National Australia Bank Ltd. survey of more than 400 companies released today. A figure above zero shows optimists outnumber pessimists. Australian government bonds gained. The yield on the two- year security slid 17 basis points, or 0.17 percentage point, to 4.02 percent, according to data compiled by Bloomberg. The yield on 10-year notes fell to 5.44 percent from 5.48 percent before the central bank decision. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 4.42 percent. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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