SYDNEY, Aug 1 Reuters Australia39;s central bank on Tuesday held interest rates at 4.1 for a second straight month, saying past increases were working to cool demand, but retained a warning that some more tightening might be needed to curb inflation.

Wrapping up its August policy meeting, the Reserve Bank of Australia RBA largely left its economic outlook unchanged from the previous quarter, forecasting headline inflation would return to within its 23 target range by late 2025, from the current 6.

Markets had leaned toward a steady outcome given recent data showed inflation had eased for a second quarter and consumer spending was softening. However, economists were more split on the outcome, with 20 out of 36 polled by Reuters expecting a hike.

The Australian dollar extended earlier declines to be 0.9 lower at 0.6656, and futures jumped as investors scaled back the probability of a further rise at all, with a move in September seen as a less than a 20 chance.

Swaps now implied a risk of around 13 basis points of tightening by year end.

Outgoing Governor Philip Lowe reiterated that higher interest rates were working to cool demand, and would continue to do so, and the pause this month would again provide time to assess the impact of the a 400 basis point jump in rates.

The recent data are consistent with inflation returning to the 23 target range over the forecast horizon and with output and employment continuing to grow, said Lowe, adding that further tightening…