(Bloomberg) -- Australia’s central bank kept interest rates unchanged at its first meeting of a revamped policy schedule and signaled further tightening remains possible, sending the currency and bond yields higher.

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The Reserve Bank maintained its cash rate at a 12-year high of 4.35% — as predicted by economists — on Tuesday. RBA Governor Michele Bullock will be questioned on the economy and the outlook for policy by journalists at her inaugural post-meeting press conference at 3.30 p.m. in Sydney.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” the rate-setting board said in its post-meeting statement. “A further increase in interest rates cannot be ruled out.”

The Australian dollar rose as much as 0.4% to 65.08 US cents, while yields on policy sensitive three-year bonds were up six basis points to 3.73% as traders trimmed bets of a rate cut. They see the chance of a June cut at roughly 40% from about 50% beforehand, according to data compiled by Bloomberg.

“A slightly more hawkish set of comments than anticipated, particularly after the weakness in recent inflation data,” said Dwyfor Evans, head of APAC macro strategy at State Street Global Markets. “Certainly not the neutral to dovish report that some would have anticipated.”

The RBA also released its quarterly forecasts which showed inflation will only hit the midpoint of its 2-3% target band in 2026. The measure, which smooths volatile items, came in at 4.2% in the final three months of 2023.

What Bloomberg Economics Says...



“We think the evolution of inflation, demand and the labor market over coming months will lead the RBA to not only pivot to neutral, but to begin cutting rates as soon as May.”

— James McIntyre, economist

— For the full note, click here

Read more: RBA Sees Inflation Hitting 2.5% Target Mid-Point in 2026

The extended timeframe for inflation to return to target suggests the RBA will stick to its view that rates need to remain at elevated levels for some time, according to money markets and economists. That suggests Australia may be one of the last dollar-bloc economies to begin easing, they said.

Underlining that, rates traders expect the RBA to hold off policy easing until later in the year, while they are certain the Fed will cut at least once by June. Australia’s central bank is expected to carry out two quarter-point reductions this year, while the Fed is seen delivering at least four cuts.

The RBA “retains a mild tightening bias in contrast to the Fed, BoC, ECB and BoE,” said Su-Lin Ong, chief economist at Royal Bank of Canada, adding the statement was “more hawkish” than markets expected.“The language around inflation is strong despite downward revisions to inflation,” she added.

The RBA moved cautiously during its tightening campaign — its 4.25 percentage points of hikes was 1 point less than the US and New Zealand delivered. Another reason for expectations the RBA will be slower on the way down is the disinflation impulse so far in Australia is weaker than elsewhere, with productivity growth among the weakest in the developed world.

“While recent data indicate that inflation is easing, it remains high,” the board said, adding that “it will be some time yet before inflation is sustainably in the target range.”

At the same time, Australia’s labor market remains solid and the economy has shown resilience to higher borrowing costs, suggesting there’s no urgency to shift quickly to easing. Moreover, policymakers won’t want to further fuel house prices that have been driven up by a supply shortage and high immigration.

--With assistance from Tomoko Sato, Garfield Reynolds and Matthew Burgess.

(Adds Bloomberg Economics comment)

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