Australian shares erased gains to tumble nearly 1 percent after the Reserve Bank of Australia (RBA) surprised most market watchers by holding back on further easing Tuesday. The Australian dollar jumped after the RBA move, confounding investors who had bet it would deliver a back-to-back interest rate cut instead of holding off for a few months to gauge how the economy digested last month's cut.
The RBA kept the benchmark lending rate at a historic record low of 2.25 percent, despite expectations it would unveil a back-to-back rate cut to battle weak employment, easing inflation and sluggish corporate profits.
"They're clearly signaling that if we continue to see low levels of confidence they will go again. We're still comfortable with our view that they'll cut again in the next couple of months," said NAB senior economist Spiros Papadopulos.
Australia's S&P ASX 200 index nosedived, while the Australian dollar bounced up nearly half a cent, from $0.7797 to $7834 against the dollar, following the Reserve Bank of Australia's policy decision.
The banking sector, which was the outperformer for the day, reversed direction; Commonwealth Bank of Australia led losses with a fall of 1.1 percent, while Westpac, National Australia Bank and Australia & New Zealand Banking lost between 0.3 to 1 percent each.
On the domestic data front, Australia's government spending for consumption rose 0.3 percent in the final quarter of 2014 to an inflation-adjusted A$70.3 billion, according to data by the Australian Bureau of Statistics released early Tuesday. Building approvals in January, meanwhile, rose 7.9 percent.