(Bloomberg) -- Australia’s central bank kept its key interest rate unchanged and maintained a tightening bias as Governor Philip Lowe wrapped up his final meeting at the helm with inflation in retreat.

The Reserve Bank held its cash rate at 4.1% for a third straight meeting on Tuesday in a decision widely anticipated by markets and economists. The consecutive pauses imply a higher hurdle for any further hikes and suggest a surprise shift in economic data will be needed to prompt additional tightening.

“While Lowe may have been slow to start hiking rates, he departs with his head held high, knowing that much of the heavy lifting required to bring inflation under control is in place ahead of Michele Bullock’s tenure,” said Tony Sycamore, markets analyst at IG. The governor’s term ends Sept. 17.

Expectations the RBA is near the end of its tightening cycle sent the currency tumbling 1.2% against the dollar, it’s biggest drop in a month, while the policy sensitive three-year government bond yield pared an earlier rise.

Lowe has moved at a slower pace than most of his major counterparts, reflecting rapid pass-through of hikes to Australian borrowers who are mainly on floating-rate mortgages, as opposed to the typical US 30-year fixed rate. His judgment call of 4 percentage points of hikes compared with the Federal Reserve’s 5.25 appears to be paying off with inflation now steadily cooling. 

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks,” Lowe said in his post-meeting statement.

The diverging policy outlook with the US and fears over China’s economy have sent the Aussie dollar diving more than 4% against the greenback this quarter, the worst performing major developed market currency.

“The RBA’s policy stance remains a weight on the Aussie, especially against the dollar where the Fed funds rate seems highly likely to remain 125+ basis points above the RBA cash rate deep into 2024,” said Sean Callow, senior currency strategist at Westpac Banking Corp.

Figures last week showed a faster-than-expected slowing in monthly inflation even as Australia’s job market — like many in the developed world — shows surprising resilience.

Yet, Lowe highlighted “significant uncertainties around the outlook,” including the risk of services price inflation staying sticky in Australia. 

“The outlook for household consumption also remains uncertain,” he said. Underscoring the need for caution, Australian households remain among the most leveraged in the developed world, with a debt-to-income ratio of 188%.

There are also concerns offshore as China, Australia’s biggest trading partner and a key driver of the global economy, is engulfed in a housing crisis. Weaker Chinese demand is flowing through to key commodity prices like iron ore and coal that generate much of Australia’s wealth.

Even so, economists expect the RBA will need to increase borrowing costs at least one more time to 4.35%, pointing to the nation’s ultra-low unemployment rate of 3.7% and still-elevated inflation. CPI is only forecast to return to the RBA’s 2-3% target in late 2025.

Lowe has acknowledged the path to a soft landing is “narrow,” while reiterating that the bank will do what it takes to bring inflation back to target. Data on Wednesday is expected to show modest economic growth in the second quarter, with activity largely driven by exports.

“We anticipate that the economy will continue to cool over the second half of the year,” said Callam Pickering, economist at global job site Indeed Inc. “If that can also drag down some of the domestic sources of inflation, then the RBA’s tightening cycle may be over.”

--With assistance from Matthew Burgess and Tomoko Sato.

(Updates markets, adds analyst comment.)

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