SYDNEY, Sept 24 Reuters Australia39;s central bank on Tuesday held interest rates steady as expected and reiterated that policy needed to stay tight to bring inflation to heel, sticking to its guns a week after the Federal Reserve started its easing campaign with a bang.

The hawkish stance sent the Australian dollar 0.4 higher to 0.6864, the highest this year, and markets pared the chance of a December rate cut to 59 from 64 before the decision.

Wrapping up its September policy meeting, the Reserve Bank of Australia RBA kept rates at a 12year high of 4.35 and said policy would have to be sufficiently restrictive to ensure inflation returned to target.

While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high, the board said in a statement largely similar to the one in August.

Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.

Markets had wagered heavily on a steady outcome given underlying inflation remained sticky and the labour market held up surprisingly well.

Underlying inflation is still too high for the RBAs liking, and progress back to the target range is frustratingly slow, said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

The RBA has kept rates steady since November, judging that the cash rate of 4.35 up from a recordlow 0.1 during the pandemic is…