Australia dollar slips, bonds rally as RBA downs hawks

SYDNEY, May 7 (Reuters) - The Australian dollar slipped and bonds rallied on Tuesday after the country's central bank held interest rates steady as expected and sounded less hawkish on the policy outlook than many had wagered on.

The Aussie lost a quarter of a cent to $0.6603 after the Reserve Bank of Australia (RBA) wrapped up its May policy meeting by holding cash rates at 4.35%, where they have been since a hike in November last year.

All but one of 25 analysts polled by Reuters had forecast a steady outcome, but there had been speculation the central bank would reinstate an explicit tightening bias given inflation had surprised on the high side in the first quarter.

Instead, the RBA board maintained much the same wording as from its March meeting, saying it was ruling nothing in or out on rates while adding only that it would be vigilant to upside risks on inflation.

Futures markets reacted by lowering the chance of a further rate hike to 16%, from around 40% before the statement.

Australian 3-year bond futures rose 8 ticks to 96.060 , having been as low as 95.840 at one stage last week.

Yields on 10-year bonds fell 7 basis points to 4.32%, off a recent five-month top of 4.55%.

However, forecasts from the RBA's economics unit released on Tuesday did read more hawkish, assuming rates would not now be cut until mid-2025, nine months later than it predicted back in February.

"This suggests they will be highly vigilant and responsive to upside inflation surprises, and they also see the labour market running tighter than in their previous forecasts," said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

"There is clearly a very high bar for raising interest rates further given the ongoing weakness in consumer spending and activity more broadly," he added. "But another upside surprise on inflation will severely test the RBA's patience."

Markets imply no chance of a rate cut this year and only some prospect of an easing by March 2025.

That contrasts with pricing for the U.S. Federal Reserve, where futures imply an 80% chance of a rate cut by September and have 43 basis points of easing priced in for this year.

The kiwi dollar held steady at $0.6011, just short of last week's high of $0.6050. Major resistance lies at its April peak of $0.6084. (Reporting by Wayne Cole; Editing by Jamie Freed)