The Reserve Bank of Australia (RBA) held rates steady as forecast on Tuesday, reaffirming its open stance on measures to control inflation, prompting markets to slightly reduce the likelihood of a rate cut in November.

Concluding its August policy meeting, the central bank held interest rates at a 12-year high of 4.35%, stating that the policy must remain sufficiently restrictive to bring inflation back to target, Reuters reports.

Markets had strongly anticipated a steady outcome, as core inflation had declined as expected in Q2, whilst recent volatility in global markets supported a cautious policy approach.

“Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range,” according to a statement by the RBA Board.

“Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”

The Australian Dollar remained stable at $0.6506, and three-year bond futures maintained their gains at 96.48 at the time of writing. Following the RBA’s decision, markets slightly reduced the probability of a first rate cut in November to 68%, down from 88% prior to the announcement.

Since May 2022, the RBA has raised interest rates by 425 basis points. However, with inflation still at 3.8% last quarter, exceeding the central bank's target range of 2-3%, policymakers deliberated whether the current policy stance was sufficiently restrictive.

Indeed, the board said Australia’s economic outlook remained “highly uncertain” and the path to inflation returning to target had been “slow and bumpy,” Yahoo News reports.

Underlying inflation remained elevated at 3.9% last quarter and is now anticipated to decelerate more gradually than previously forecast. However, headline inflation is expected to revert to within the target range early next year.

“The RBA’s forecasts are projecting a more volatile path for inflation due to the impact of government policies announced in the last budget. (But) this outlook is tempered by a slightly weaker outlook for the labour market than the one presented in the May forecasts,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

“We think the economy is now out of the ‘danger zone’ where further rate hikes were possible. But, households will need to be patient in waiting for interest rate relief. The economy is slowing, but spare capacity is scarce. We do not expect the first rate cut to come until early 2025.”