By Jacob Greber Feb. 2 (Bloomberg) -- Australia’s central bank unexpectedly paused in raising interest rates as Governor Glenn Stevens opted to support the economy’s acceleration and stem inflation later. The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase. Australia’s dollar tumbled to a six-week low and Asian stocks pared gains after the announcement sparked concern at the economy’s ability to withstand higher borrowing costs. Business confidence fell to a six-month low, a report showed today, and Woolworths Ltd., the country’s biggest retailer, warned last week that rate increases would hurt consumers. “The rapid adjustment process is over and the rate hikes, when they do come, will be further apart,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The overarching message from the Reserve Bank is that while things are better than we thought, we’re not out of the woods just yet.” The Australian dollar fell to 87.98 U.S. cents at 4:57 p.m. in Sydney, near its lowest since Dec. 24, from 89.24 cents just before the decision was released. The two-year government bond yield plunged 21 basis points to 4.04 percent. A basis point is 0.01 percentage point. The MSCI Asia Pacific Index of stocks was up 0.9 percent as of 4:50 p.m. in Sydney after climbing as much as 1.6 percent before the RBA’s release. Future Increases As information about the impact of the bank’s previous 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. Borrowing costs will be “adjusted further” to keep inflation within the central bank’s target range of 2 percent to 3 percent “if economic conditions evolve broadly as expected,” he said. Inflation should remain within the target this year, he said. Stevens became the first central banker in the world to raise borrowing costs three times last year after Australia’s economy skirted the global recession, helped by A$20 billion ($18 billion) in cash handouts to consumers from Prime Minister Kevin Rudd and another A$22 billion in spending on roads, railways and schools. Global Rates By contrast, officials in the U.S., the U.K. and Europe have kept their benchmark lending rates at historic lows. The rate gap has contributed to making the Australian dollar the top performer against its U.S. counterpart since the start of September among the most-traded currencies. There are signs Governor Stevens’s rate increases in October, November and December are restraining the mortgage market. Policy makers didn’t meet in January. Borrowing for home buying fell to a five-year low last month, according to a report yesterday by Australian Finance Group Ltd., which says it accounts for more than 10 percent of the mortgage market. The group arranged A$1.55 billion of mortgages in January, 19 percent less than a year earlier and the lowest level for any month since 2005. Most mortgage rates in the economy have increased by about 1 percentage point since October, outpacing the central bank’s 75 basis point increase in the benchmark rate, Stevens said today. Pause Welcomed “Three consecutive hikes late last year coupled with out- of-cycle increases by commercial banks appeared to have stung,” said Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Today’s decision “reduces the serious risk of a policy blunder. A pause is welcome.” Australian & New Zealand Bank Group Ltd. boosted its variable mortgage rate by 35 basis points after Stevens raised the overnight cash rate target by 25 basis points on Dec. 1. Commonwealth Bank of Australia raised its home-loan rate by 37 basis points and Westpac Banking Corp. moved by the largest amount, driving up its mortgage rate by 45 basis points. Westpac’s move means households with a A$300,000 mortgage are being charged an extra A$1,008 a year, instead of the A$576 that would have been imposed had the bank merely passed on the Reserve Bank’s increases. “Interest-rate rises are not good for consumers full stop,” Michael Luscombe, chief executive officer of Australia’s biggest retailer Woolworths Ltd., said in an interview last week. “I think 2010 is going to be a challenging year.” Woolworths posted the slowest sales growth in a Christmas quarter since 1993. Consumer spending accounts for more than half of Australia’s economy. Swan Happy Households will “welcome this decision and businesses will welcome this decision,” Treasurer Wayne Swan told parliament in Canberra today. Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. Lending to companies “has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said today. “Credit conditions remain difficult for many smaller businesses,” he said. While all the economists surveyed by Bloomberg predicted an increase today, financial markets were less certain. Traders bet there was a 74 percent chance of a move, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange prior to the decision at 2:30 p.m. Stocks Fall Investors’ concerns that global growth may be weak this year are among reasons stock markets have fallen since the start of 2010. Australia’s benchmark S&P/ASX 200 index has shed almost 6 percent since Dec. 31. Nouriel Roubini, the New York University professor who anticipated the financial crisis, said on Feb. 1 in Davos, Switzerland, that the U.S. growth outlook remains “very dismal,” and White House economic adviser Lawrence Summers said the economy is still mired in a “human recession.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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