Australia's central bank holds rates as it frets over trade war risk

SYDNEY (Reuters) -Australia's central bank on Tuesday left its cash rate steady as widely expected but took a small step towards further easing in a policy meeting dominated by risks of a global trade war.

Wrapping up its April policy meeting, the Reserve Bank of Australia (RBA) held interest rates steady at 4.1%, having just cut them by a quarter point in February for the first time in over four years.

Markets had seen scant chance of a further easing this week given policy makers had emphasised that they needed to be certain core inflation was under control before acting again. [AU/INT]

"Monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation," the board said in a statement.

The statement also dropped an explicit reference to being cautious about cutting rates again, in a slightly dovish tone. It also omitted a sentence that upside risks to inflation remain.

Governor Michele Bullock, in the post-decision press conference, said the board did not discuss a rate cut this time, and the slightly dovish turn in the statement did not open the door to an easing in May.

"We still think there is tightness in the labour market, so at the moment it seems prudent to wait and get a bit more data, a bit more information about labour market and inflation to make sure."

The Australian dollar perked up 0.3% at $0.6262, while the three-year bond futures held steady at 96.31. Swaps moved around after the RBA decision and implied a 60% probability of a rate cut at the next policy meeting in May.

The recent flow of data has printed largely in line or slightly weaker than expected. A benign inflation reading for February has raised hopes that the quarterly price data due at the end of the month would be tame enough for the RBA to move in May.

There are two monthly job reports due before the May meeting.

"We view the statement as providing the Board a degree of optionality regarding future monetary policy moves," said Adam Boyton, head of Australian economics at ANZ, who is forecasting just one more rate cut in August.

"However, greater market instability and global policy uncertainty could see additional (and earlier) RBA easing."

Earlier in the day, data showed retail sales rose a modest 0.2% in February, underscoring consumer demand remained tepid.

The steady decision means the centre-left Labor government won't get a rate cut boost in polling ahead of a general election on May 3. Prime Minister Anthony Albanese is struggling in polls over the high costs of living and housing.

The central bank has pushed back against easing expectations after the rate cut in February, which already lifted housing prices to a record last month.

GLOBAL UNCERTAINTIES

Australia's economy has moved past its worst, with consumer spending picking up amid lavish government tax cuts. However, the outlook has been clouded by the spectre of a global trade war as U.S. President Donald Trump imposes a blitz of tariffs on trading partners and is set to announce reciprocal tariffs imminently.

Australia is a major exporter of resources to China and tariffs on the world's second-biggest economy's goods could hinder growth there and its demand for commodities.

The Federal Reserve has taken a cautious approach to further rate cuts due to concerns Trump's policies will stoke inflation, though investor anxiety over a possible U.S. recession has also risen in recent months.

Bullock said the central bank is speaking to its peers in other central banks, particularly small and open economies to make sense of what's going on and what can be expected over the next year.

"There is a lot more uncertainty introduced in the international context. What it means for us is not 100% clear. We're cautious. We are going to wait," said Bullock.

The RBA added the overseas developments will have an adverse effect on global activity and Australia is vulnerable given its reliance on world trade. Much will depend on China's response to the U.S. tariffs, Bullock said.

However, the implications on prices is less clear, with the RBA saying that inflation "could move in either direction."

(Reporting by Stella Qiu and Wayne ColeEditing by Shri Navaratnam)