The Reserve Bank of Australia continues to "step on the brakes," signaling that inflation may start to strengthen.

The Reserve Bank of Australia (RBA) kept its key interest rate unchanged on Tuesday, while warning that inflation in the third quarter could be stronger than expected, prompting traders to scale back bets on near-term policy easing.

The RBA Board on Tuesday kept its cash rate unchanged at 3.6%. The central bank has already cut rates three times this year. The RBA reiterated that it remains cautious about the outlook, and future moves will be determined by economic data.

In a statement, the RBA Board said, "Given signs that private demand is recovering, indications that inflation may be persistent in some areas, and the overall stability of labor market conditions, the Board decided it was appropriate to keep the cash rate at its current level."

Traders have cut their bets on an RBA rate cut in November to less than 50%. The AUD/USD edged higher, while the yield on the policy-sensitive three-year government bond rose slightly to 3.60%.

This decision comes as some economists have postponed their expectations for a fourth RBA rate cut to next year, having previously expected policy easing in November. This is due to the possibility of renewed price pressures amid a still-tight labor market.

The RBA's pause comes after the Federal Reserve made its first rate cut since last December earlier this month. Pricing in the currency markets suggests the Fed could cut rates about two more times by the end of the year.

In contrast, the next RBA rate cut is fully priced in for February next year, increasing the likelihood of a widening policy divergence with the US.

Governor Bullock testified in parliament last week, stating that economic data has been "in line with" or "stronger than" the RBA's expectations. Officials also noted that with the recovery in private sector demand, the economy is showing signs of a "cyclical upturn." A private consumer survey by investment bank UBS Group this month pointed to the strongest reading since records began six years ago.

The Board said, "The real estate market is strengthening, indicating that recent rate cuts are having an effect, and both households and businesses have ready access to credit."

Last week, a monthly inflation indicator released by Australia accelerated for the second consecutive month in August, reaching the upper limit of the RBA's 2%-3% inflation target. Economists have warned that consecutive rises in inflation data suggest inflationary pressures are re-accelerating more broadly. The second part of the central bank's mandate, full employment, appears to be on track, with the unemployment rate steady at 4.2% in August.

The Board said, "Recent data is patchy and volatile, suggesting that inflation in the September quarter may be higher than expected at the time of the August Monetary Policy Statement."

Internationally, Australia's outlook is clouded by uncertainty due to the Trump administration's protectionist policies and heightened geopolitical tensions. RBA officials have repeatedly stated that their worst-case scenario regarding tariffs has not materialized, as Australia has secured a 10% global benchmark tax rate and many countries have not retaliated against the US.

However, uncertainty remains widespread. There are concerns that the US government could shut down, and investors are watching to see if a short-term spending bill can be agreed upon. If not, it could threaten the release of Friday's employment report.

In addition, US President Trump last week announced a new round of tariffs on drugs, heavy trucks, and furniture, betting that these tariffs will help protect US jobs and increase government revenue. But many economists say these tariffs will hurt US and global growth as rising goods prices squeeze household budgets and corporate profit margins. The RBA will release its semi-annual Financial Stability Review on Thursday.