Australia's central bank on Tuesday held interest rates steady saying it wanted more time to assess the impact of past hikes, but reiterated its warning that further tightening might be needed to bring inflation to heel.
Wrapping up its July policy meeting, the Reserve Bank of Australia (RBA) kept its cash rate at an 11-year high of 4.10%, having lifted rates by 400 basis points since May last year, in its most aggressive tightening cycle in modern history to tame inflation.
Markets had been leaning towards a pause, but economists were split on the outcome, with 16 out of 31 polled by Reuters expecting a hike and the rest forecasting the bank to stand pat. .
The Australian dollar dipped 0.4% to $0.6647. The market has now shifted to imply around a 50-50 chance of a hike to 4.35% in August, while scaling back the risk of a further move to 4.6%.
In Tuesday's policy statement, RBA Governor Philip Lowe said that higher interest rates are working to establish a more sustainable balance between supply and demand in the economy.
"In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month."
The RBA chief pointed to uncertainties about the outlook for household consumption and regarding the global economy.
However, Lowe repeated previous warnings that some further tightening of monetary policy might be required as "inflation is still too high and will remain so for some time yet."
"Today's decision to pause rate hikes shows the RBA has realised the economy is on a knife's edge and that it must pivot to achieve its goal of threading a 'narrow path' through current economic conditions," said Stephen Smith, Deloitte Access Economics partner.
The RBA first paused in April and then surprised markets by resuming its hikes both in May and June, a hawkish tilt that led many economists to see a higher chance of a recession this year given anaemic economic growth.
Economic data over the past month have been mixed. A sharp cooling in a volatile monthly inflation reading argued for a pause, but a blockbuster jobs report and strong retail sales point to some work to be done by the RBA.
HIKE IN AUG?
Indeed, many economists see a decent chance of a hike in August after the release of the second-quarter inflation figures in late July, which is likely to reveal inflation remained sticky.
"With the labour market still very tight, house prices rebounding strongly and unit labour costs surging, another 25bp rate hike in August still looks likely and we suspect the Bank will follow that up with another one in September," said Marcel Thieliant, a senior economist at Capital Economics.
The central bank currently forecasts headline inflation - which was running at 7% in the first quarter - to return to the top of its target range of 2-3% by mid-2025.
Global policymakers are still grappling with relatively high inflation despite sweeping rate increases for more than a year. Both the Federal Reserve and the European Central Bank are almost certain to hike by a quarter-point this month, which could pressure an already soft Australian dollar.
Lowe is also set to find out this month whether he would be reappointed for a second term. The governor, a four-decade veteran at the bank, has been under a cloud since repeatedly saying in 2021 that interest rates would not rise until 2024, only to reverse course and hike in mid-2022 when inflation unexpectedly surged.
