Australia's central bank has left its cash rate steady as expected at 3.6%, saying recent data suggested inflation might be higher than forecast in the third quarter and that the economic outlook remained uncertain.
Wrapping up a two-day policy meeting, the Reserve Bank of Australia said the board judged it was appropriate to remain cautious on policy, but was well-placed to respond to international developments.
Markets had seen scant chance of a further easing this week after a strong second quarter GDP report and a high monthly inflation reading that argued for a measured pace of policy easing.
Swaps now imply a 40% probability of a rate cut at the next policy meeting in November, down from 50% before the statement.
"Recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy," the board said in a statement.
"The board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve. The board remains alert to the heightened level of uncertainty about the outlook," it added.
The RBA has so far adopted a gradual and cautious approach to policy easing, having cut rates in February, May and August after assessing inflation data for each quarter. It has said the pace of further policy easing depends on the flow of data.
The often volatile monthly readings on inflation suggest the quarterly outcome could surprise on the upside. Meanwhile, the economy grew at the fastest annual pace in almost two years in the second quarter as consumption picked up after a long fallow period.
Employment growth has slowed but the jobless rate hovered at a historical low of 4.2%. The central bank judged the labour market was close to full employment but there is still tightness in some industries.
"Overall, today's statement casts some doubt as to whether the Bank will cut rates by 25 basis points at its next meeting in November, as we currently expect," said Abhijit Surya, senior APAC economist at Capital Economics.
"Nevertheless, we still think there's a strong case for the Bank to resume policy easing before long," the economist added.
The central bank had forecast headline inflation, which ran at 2.1% last quarter, to pick up to 3.1% by the middle of next year, as electricity rebates fade, but core inflation is expected to stay anchored around 2.6% over the coming years.
"Financial conditions have eased since the beginning of the year and this seems to be having some impact, but it will take some time to see the full effects of earlier cash rate reductions," the board added.
