Australia Dodges Rate Cut, but Is its Next Move a Done Deal?

The Reserve Bank of Australia (RBA) passed on the opportunity to cut interest rates at a policy meeting on Tuesday, but weakening economic conditions could force its hand next month, economists tell CNBC.

Australia Dodges Rate Cut, but Is its Next Move a Done Deal?

The RBA held rates steady at 3.25 percent, surprising analysts who were betting on a rate cut and sending the Australia dollar to a five-month high of $1.0437 .

However, it is a matter of time before the central bank has to ease again to lift the Australian economy given a weak local labor, economists say.

"We are still of the view that there will be another cut before the end of the year," said Paul Bloxham, chief economist for Australia and New Zealand at HSBC. "They didn't ease today partly because global conditions have stabilized and also because the inflation numbers surprised them a bit. But we still think that domestic conditions do warrant a rate cut."

Underlying inflation in the third quarter rose to an annual 2.5 percent, from 2 percent in the previous quarter, moving back to the middle of the RBA's long-term target band of 2 to 3 percent.

The labor market will now be a key determinant of the RBA's next move, Bloxham said. There are signs of a weakening in Australian employment conditions, with the unemployment rate rising by more than expected to 5.4 percentin September from 5.1 percent in August.

Job ads meanwhile fell 4.6 percent in October from September, the seventh consecutive monthly decline and the biggest fall in 18 months, ANZ Bank said on Monday.

If the October jobs numbers, due out on Thursday, show that the labor market has weakened further, the RBA will be moved to cut rates by 25 basis points at the December meeting, Bloxham said.

Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole in Hong Kong, also expects a quarter-point rate cut next month.

(Read more: Rate Cuts Are No Threat to a Robust Aussie Dollar)

The RBA has already eased interest rates by 150 basis points in the past year in the face of a deteriorating global economic outlook. It's not the only major central bank to take action against such a backdrop, with the both the Federal Reserve and Bank of Japan unleashing monetary stimulus in recent months.

Wait and See?

Monetary policy was "appropriate for the time being" because inflation has been slightly higher than expected and there have been some encouraging signs from the global economy, RBA Governor Glenn Stevens said on Tuesday following the decision to leave monetary policy unchanged.

"Further effects of action already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation," he added.

A pick-up in inflation is one reason for the RBA to not rush into further monetary easing. Another is that the outlook for the global economy is less gloomy than it was a couple of months ago, with recent data pointing to some stabilization in China and steady, if slow, improvement in the United States.

Gavin Stacey, head of Australia and New Zealand rates strategy with Barclays, is therefore not expecting another rate cut this year unless fresh data point to a need to ease further.

"What they're (RBA) telling us is that inflation is a bit more of a problem than they thought," Stacey told CNBC Asia's "Capital Connection".

"And I think now they're sitting back and letting the data tell them whether or not they've got more to do on the easing front or whether they can move to the sidelines."

-By CNBC's Jean Chua.