The accompanying statement released by RBA Governor Glenn Stevens following the decision noted the substantial tightening in financial conditions was continuing to exert constraints on households, while monetary policy has gained traction in recent months.

"…there is no doubt that the RBA is pleased with the weaker activity data of late," noted Su-Lin Ong, a senior economist at RBC Capital Markets. "However, given 'the opposing forces at work' (notably the rise in the terms of trade) and the step up in inflation in early 2008, the RBA hinted that the door remains open to further tightening."

In its statement, the RBA suggested that current policy is appropriate, but Ong noted an added sentence that stated: "Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed."

"Effectively, the onus remains on the activity data to continue to weaken," Ong said. While Ong said she expects this to be the case, she noted some wild cards remain, including the further likely rise in the terms of trade, impending income tax cuts from July 1 and the still strong labour market. "The statement was consistent with the RBA on hold for the foreseeable future and firmly in data watch and worry mode."

Economists from Westpac noted the decision was in line while the statement was not. "While the bank did not revert to a specific tightening bias it does seem much less assured of its strategy than was the case following the board meeting on April 1," they wrote in a client note. They noted the uncertainty stems from the higher-than-expected recent inflation read and the developments with regard to the terms of trade.

"(We) maintain our view that rates will be on hold for a long period of time as the Bank implements the strategy described above," they wrote. "Unlike most other commentators, we are not expecting to see a change in that strategy before the end of 2009."

Jonathan Loynes, an economist at Capital Economics, said that given consumer confidence is at a 25-year low and wholesale market rates are tightening independently of the official rate, "we think that it is more likely than not that the rate tightening cycle has run its course."

Markets will receive a more detailed explanation of the bank's view of the economy on Thursday at 9:30 p.m. EDT with the release of the quarterly Statement on Monetary Policy.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it