Australia's central bank holds rates steady, cautious on inflation

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RBA keeps cash rate at 3.60% amid inflation concerns

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Swaps imply 36% chance of November cut, 50% for December

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Australian dollar rises, bond futures fall after RBA decision

(Adds comments from RBA Governor Michele Bullock)

By Stella Qiu and Wayne Cole

SYDNEY, Sept 30 (Reuters) - Australia's central bank on Tuesday left its cash rate steady as expected at 3.60%, 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.

The more cautious commentary from the central bank prompted markets to further trim bets on rate cuts this year and for some analysts to even call a possible end to the current policy easing cycle if conditions remain upbeat.

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.

Speaking to reporters after the decision, Governor Michele Bullock said the central bank would remain data dependent and by November have quarterly inflation data, a labour market report and updated economic forecasts, as well as more forward looking indicators to decide on policy.

"What we are focusing on is an interest rate path that will deliver us inflation sustainably in the band. That could mean a couple more reductions. It might not. I don't know at this point and we will look at all this again in November."

The central bank said recent data, while partial and volatile, suggests that inflation in the third quarter may be higher than expected due to sticky prices in market services, adding that it was appropriate to remain cautious.

The Australian dollar rose 0.4% at $0.66 after the meeting, while three-year bond futures fell 4 ticks to 96.40. Swaps now imply around a 36% probability of a rate cut at the next policy meeting in November from 55% previously, while a move in December is about 50% priced in from 70%.

CAUTIOUS TURN

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.

"The post-meeting statement is a little more hawkish than we'd expected and heightens the risk evident after the August monthly CPI indicator that the November meeting passes without a rate cut," said Adam Boyton, head of Australian economics at ANZ.

"Absent a 'shock', the tone of today's post-meeting statement also suggests that we are quite close to the end of the easing cycle."

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.

Bullock said she judged the current cash rate as "a little bit" restrictive. Financial conditions have eased since the beginning of the year, although the full effects are still taking time to flow through, she added.

"A downside Q3 inflation surprise is needed for the RBA to cut in November," said analysts at Citi Australia, noting unexpected jobs weakness could also provide a catalyst.

"Overall, we expect one more 25bp cut in February 2026. However, we note risks that the RBA could be done in this cycle."

(Reporting by Stella Qiu; Editing by Sam Holmes)