Australia shares end flat after RBA stuns with steady rates

Australian shares were flat on Tuesday after the Reserve Bank of Australia (RBA) held interest rates steady, defying expectations of a quarter-point cut.

The S&P/ASX 200 benchmark index XJO slipped to 8,562.60 after the RBA's announcement but pared the losses to end flat at 8,590.70 points. The benchmark had closed 0.2% lower on Monday.

The majority of the RBA's board wanted more proof of slowing inflation before pushing the button on easing, the central bank said, stunning markets that were confident of a 25 bps cut.

The move sent the local currency 0.8% higher and the three-year bond futures lower, suggesting markets are anticipating an 85% chance of the cash rate being cut to 3.60% in August. Markets are now pricing in rates bottoming at 3.10% rather than 2.85% as of December.

A rate hold in the short term is likely to push the Australian government bond yields higher, a headwind for equities, particularly rate-sensitive sectors like A-REITs, said Russel Chesler, head of investments & capital markets at investment management firm VanEck.

"However, the RBA's decision also signals their confidence in the economy... As markets digest this, we think this should support equities over (the) medium term, especially cyclical-orientated sectors such as Australia's banks and industrials."

Rate-sensitive financials XFJ slipped slightly after the decision, with top lender Commonwealth Bank CBA emerging as the biggest drag. However, the sub-index ended 0.4% higher.

Real estate stocks (.AXRE), also impacted by rate changes, lost 0.6%, with Mirvac Group MGR dropping 1.8% and real asset manager Dexus DXS falling 1.3%.

Miners XXMM added 0.2%, tracking a rebound in iron ore prices. However, BHP BHP, Rio Tinto RIO and Fortescue FMG fell between 0.4% and 0.9%.

Meanwhile, New Zealand's benchmark S&P/NZX 50 index NZ50G rose 0.7% to 12,859.02 points, a day before the local central bank is anticipated to hold rates steady.