(Bloomberg) -- Australia’s central bank signaled it’s done tightening monetary policy after leaving interest rates at a 12-year high, sparking a selloff in the currency and a rally in bonds.

The Reserve Bank held its cash rate at 4.35% for a third straight meeting on Tuesday and scrapped any reference to possible further increases. In response, the currency fell to a two-week low and the policy-sensitive three-year government bond yield dropped to 3.67%. Stocks gained.

“We have changed the language that’s true,” Governor Michele Bullock said at a press conference in Sydney after the decision. “We are not confident enough to say we can rule out further interest rate changes, but we do think that we are on the path to get ourselves back to inflation in target within our forecast.”

When asked whether the RBA has pivoted to neutral, Bullock acknowledged that risks to the outlook were “finely balanced.” She reiterated that the bank is in data-dependent mode and will only begin lowering rates once it’s confident inflation is on track to move sustainably back to the 2-3% target.

Westpac Banking Corp.’s Chief Economist Luci Ellis — a former RBA assistant governor — said the board is “most likely on hold for a while,” while Su-Lin Ong, chief economist at the Royal Bank of Canada, said she was “squinting” to see a tightening bias. Commonwealth Bank of Australia’s Gareth Aird said the key development in the release was the “removal of its hiking bias.”

“What remains in the media release are the words of a central bank that is on hold, but not quite willing to say so outright,” Ellis said. “By saying it is not ruling anything in or out, the board is flagging the possibility that some shock could still derail the current trajectory of declining inflation and require a rate hike. But there is no sign of this occurring.” 

Bullock’s press conference provided few clues on the potential timing of an easing cycle. When asked about the prospects for rate cuts, the governor said she could not provide a “definite answer” given the uncertainties to the economic outlook.

“What we need to consider a rate cut is really to be much more confident that inflation is coming back into the band in the future,” she said. 

First-quarter inflation is due next month, with economists expecting it will be lower than the 4.1% reading in the final three months of 2023. The RBA’s latest forecasts show inflation only returning to its 2-3% target in late 2025.

Rates traders reckon Australian policymakers will hold off on cuts until September. Australia’s central bank is expected to carry out as many as two quarter-point reductions this year, while the Federal Reserve is seen delivering up to three cuts.

The RBA’s on-hold call comes in a week that features the world’s biggest agglomeration of policy decisions to date in 2024, including announcements in the jurisdictions of six of the 10 most-traded currencies. 

The Bank of Japan raised its interest rate for the first time since 2007 and scrapped its yield-curve control policy shortly after Australia’s announcement on Tuesday. The US central bank concludes its meeting on Wednesday, when it’s expected to extend a pause, and the Bank of England meets Thursday.

Data since the RBA’s February meeting has indicated a slowdown in the economy. Inflation is cooling, retail sales have slowed noticeably over the past year and the labor market is showing signs of loosening. Jobs data for February will be released on Thursday.

What Bloomberg Economics Says...

“A very gradual shift toward easing is evident in the RBA’s March statement. The forward-looking policy guidance has shifted from not ruling out a hike to indicating potential two-way risks for rates”

— James McIntyre, economist. 

For the full note, click here

Australian Treasurer Jim Chalmers welcomed the central bank’s rate call in a comment to parliament.

“This decision is a reflection of the good progress that we are making as a country in the fight against inflation,” he said. “It gives us confidence that inflation is moderating in welcome and encouraging ways.”

On Friday, the RBA publishes its semi-annual financial stability report which will set out the impact of rising borrowing costs on Australian banks. 

--With assistance from Ben Westcott, Hooyeon Kim and Marcus Wong.

(Adds quotes from press conference and economists’ comments.)

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