By Devayani Sathyan
BENGALURU (Reuters) - Australia's central bank will hold its key policy rate at 4.35% for a fourth straight meeting on Tuesday and at least until end-September, according to a Reuters poll of economists who forecast just one interest rate cut this year.
That change in expectations from two 25 basis point cuts in an April survey follows news inflation fell less than expected last quarter and the labour market remains tight.
Although inflation slowed to 3.6% from 4.1% previously, it was not expected to fall below the Reserve Bank of Australia's 2-3% target range until 2025, suggesting the central bank will have to hold rates higher for longer.
"Services inflation is still a serious problem that has to be dealt with. And the most painless remedy for a central banker is higher for longer cash rates," said Craig Vardy, head of fixed income at BlackRock (NYSE:BLK) Australasia.
"They were late to start hiking, have not hiked as high as other major central banks, so expecting them to start cutting prematurely was odd from our point of view. If they were to cut, and then have to reverse course soon after, it would have destroyed their credibility."
The RBA in recent months has sought to manage rate cut expectations, maintaining a "not ruling anything in or out" stance.
That has led financial markets to factor in an extended pause, an even more hawkish stance than economists in the poll.
All but one of 37 economists in the April 30-May 2 poll expected the RBA to hold its official cash rate at 4.35% at the end of its two-day policy meeting on May 7. One expected a 25 basis points hike.
"We expect they (RBA) will remain on hold, but they will probably maintain and possibly amp up their rhetoric about the risk of a hike. I don't think the (inflation) surprise we saw in March was enough to tip the balance to them hiking, but you cannot rule it out completely," said Luci Ellis, chief economist at Westpac.
All major local banks - ANZ, CBA, NAB, and Westpac - predicted no rate change until at least end-September and all four saw just one 25 basis point cut in November.
Median forecasts showed rates at 4.10% by end-year, 25 basis points higher than the April poll. The RBNZ was predicted to cut rates by 50 basis points this year, a separate Reuters poll showed.
Even with the U.S. Federal Reserve expected to hold rates higher for longer, the Australian dollar and the New Zealand dollar were forecast to gain over 2% against the greenback in the next six months, another Reuters poll found.
The Australian and New Zealand dollars were forecast to trade around $0.67 and $0.61 by end-October.
Analysts forecast the Aussie and kiwi dollars will recover all their year-to-date losses, 4% and 6% respectively, 12 months from now, a significant change from last month's poll.
"In the near term we'll see both Aussie and kiwi remain under a little bit of pressure as we see indications of higher for longer from the U.S. Federal Reserve. Once we get through the next two or three months, we expect both the Aussie and kiwi will start to rally," said Ben Picton, senior strategist at Rabobank.