(Bloomberg) -- Australia’s central bank kept interest rates at a 12-year high in a widely anticipated decision, while sticking with a neutral stance that surprised markets and sent the currency and bond yields lower. 

The Reserve Bank held its cash rate at 4.35% for a fourth straight meeting on Tuesday, while raising its near-term inflation estimates and slightly reducing those for economic growth and unemployment. The updated forecasts used a technical assumption of no change in rates until mid-2025.

Read more: RBA Raises Near-Term Inflation Forecast, Lowers Unemployment

“Over the past six months we’ve seen quite a few ups and down in the data and things are quite bumpy,” Governor Michele Bullock told reporters after the decision. “What the most recent data do reinforce is we must continue to be vigilant about the continued risk of high inflation.”

The Australian dollar fell as much as 0.6% to 65.87 US cents after the decision. The yield on policy sensitive three-year bonds dropped the most since February, as swaps traders pared bets of a rate hike this year. Stocks advanced. 

“Markets likely expected the RBA to revert back its old guidance of ‘a further increase in interest rates cannot be ruled out’ given the Q1 inflation surprise,” said Alex Loo, a macro strategist at Toronto-Dominion Bank in Singapore. “Today’s unchanged guidance probably disappointed the hawks.” 

The meeting came on the heels of data showing both headline and core inflation surpassed expectations in the first three months of the year and remained well above the RBA’s 2-3% target band. Investors had aggressively shifted to the possibility of a hawkish RBA following the print, with policy sensitive three-year yields climbing the most since June last month.

“What we are really trying to do is slow things down to bring inflation down without tipping the economy into recession,” Bullock said at the press conference. “I hope that we don’t have to raise interest rates again but having said that if we think we have to we will.” 

The RBA’s gathering follows a highly-anticipated decision by the Federal Reserve last week, when Chair Jerome Powell kept hopes alive for a rate cut this year while acknowledging a burst of inflation has reduced confidence that price pressures are ebbing. 

Prior to Tuesday’s policy decision, money markets were pricing an almost even chance of a 25 basis point rate hike by August. Now, that has been pared to a roughly one-in-five chance.

Su-Lin Ong, chief economist for Australia at Royal Bank of Canada, said the RBA’s post-meeting statement was “near neutral,” as did Goldman Sachs Group Inc.’s Andrew Boak and Commonwealth Bank of Australia’s Gareth Aird. 

Stephen Miller, investment strategist at GSFM in Sydney, said the central bank “has gone from something close to a neutral bias to something resembling a tightening bias.”

Bullock acknowledged that the board had indeed discussed the possibility of a rate hike at the meeting, but decided against it as risks remained evenly balanced.

While the RBA doesn’t publish dot plots or its own forecast track for the cash rate, Bullock has previously suggested it won’t need to wait for inflation to be inside the band before cutting. Even so, she has repeatedly pushed back against speculation of easing, reflecting the RBA’s forecasts that inflation will only return to target in the second half of 2025. 

Read more: RBA Cuts 2024 GDP Forecast to 1.6%; Inflation at 3.8%

One of the unknown factors for the central bank is the impact of the government’s budget to be handed down in a week, as well as tax cuts that begin around mid-year. 

“Inflation forecasts have been revised upwards most likely factoring in the risks of the impending tax cuts and federal budget,” said Devika Shivadekar, economist at consultancy RSM Australia. “We remain confident in our call that the RBA won’t pivot until it sees two more quarterly inflation prints.”

Data recently has indicated that Australia’s economy is broadly slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. 

At the same time, the labor market remains tight with unemployment at 3.8%. Data out on Monday showed a gauge of job ads rose 2.8% in April to be up 36.5% from its pre-pandemic level.

The resilience of employment has given policymakers optimism that they can engineer a soft landing — bringing down inflation while holding onto the enormous job gains of recent years. 

--With assistance from Tomoko Sato and Matthew Burgess.

(Adds comments from governor’s press conference.)

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