On Tuesday, the Reserve Bank of Australia (RBA) maintained interest rates unchanged as expected by the market. This is the fifth consecutive time that the central bank has maintained interest rates at 4.35%.

Due to meeting expectations, the market's response to this was mediocre.

The AUD/USD exchange rate remained largely unchanged at 0.6612 after the decision was announced, while the yield on policy sensitive three-year bonds showed a slight increase. At present, the money market expects a probability of interest rate cuts before December to be less than 40%, lower than the 50% before the announcement.

It is worth noting that the RBA warned in its official statement that there is still a need to be vigilant about inflation risks.

"Although recent data has been mixed, they emphasize the need to remain vigilant about the risk of upward inflation." The interest rate setting committee stated in a statement, "The committee will rely on data and continuously evolving risk assessments."

Australia's inflation rate has also remained strong as expected, reaching a five month high of 3.6% in April.

Bank of Australia Governor Michele Bullock has repeatedly countered recent speculation about loose policies, believing that inflation will not return to target levels until the end of 2025. Bullock has maintained maximum policy selectivity this year, stating that she needs to be confident that price growth is sustainably returning to the target of 2% -3%.

Charu Chanana, head of forex strategy at Saxo Markets, stated that the Bank of Australia has maintained a hawkish stance.

She said, "The door to interest rate hikes may continue to open, but the threshold for market pricing remains high.". Similarly, until at least two more quarters of inflation data are seen, it is expected that the Bank of Australia has limited room to relax its policies.

"The door to interest rate hikes may still be open, but the pricing threshold for this will still be high in the market," Chanana said. "Similarly, it is expected that the Bank of Australia has limited room to relax policy until at least two quarterly inflation data are available."

Sean Langcake, head of macroeconomic forecasting at Oxford Economics Australia, also believes that the RBA's tone is hawkish, and he expects no change in interest rates in 2024.

Although inflation remains stubborn, there is still a factor that may affect changes in inflation.

Starting from July 1st, the Australian government will implement income tax cuts for millions of households and provide partial cost of living exemptions. In Queensland, each household will receive a $1000 electricity bill waiver starting from July. Economists believe that these measures will help support a weak economy and help lower the overall inflation rate in the second half of the year.

The Federal Bank of Australia estimates that subsidies from federal and state governments will result in a two-thirds percentage point decrease in the Consumer Price Index (CPI) for the third quarter.

However, Bullock stated earlier this month that she did not expect these cash flows to have a substantial impact on the Bank of Australia's inflation forecast.

"Although federal and state energy cuts will temporarily lower overall inflation rates, recent budget results may also have an impact on demand." The RBA board stated, "The sustained rise in service prices is a key uncertainty factor."