The Reserve Bank has left open the possibility of further interest rate cuts if wages and inflation remain stagnant and the housing market continues to cool.

In its quarterly Statement on Monetary Policy, Australia's central bank explained that Tuesday's decision to cut the cash rate to a record low 1.75 per cent was not triggered by economic growth concerns.

The RBA actually lifted its gross domestic product (GDP) forecast for the current financial year by half a percentage point to 2.5-3.5 per cent.

It also sees unemployment as having peaked and falling gradually over the next couple of years of its forecasts.

Overall, the bank said there was "no material change" to its economic growth or employment forecasts.

"GDP growth is expected to strengthen gradually to an above trend rate, reflecting the effects of low interest rates and the depreciation of the exchange rate since early 2013," the RBA noted in the report.

Low inflation expected to persist for two years

However, while Australia's economy is expected to keep ticking along, the bank felt compelled to cut rates due to persistently low inflation that is now well below its 2-3 per cent target band and forecast to remain there for at least the rest of this year.

"Despite above-trend growth in economic activity and improvements in labour market conditions over the past year, it is possible that domestic cost pressures may weaken further, and so inflation may not pick up as expected," the bank added.

In fact, the RBA only forecasts core inflation as likely to return to 2 per cent - the bottom of its target range - by 2018.

With the weak March quarter ABS consumer price index (CPI) reading of a 0.2 per cent fall in the cost of living, and just a 1.3 per cent rise in prices over the year, the RBA had a reason to cut this month.

RBA takes 'careful note' of housing market slowdown

However, the bank has revealed that it "took careful note of recent developments in the housing market, noting the effects of supervisory measures to strengthen lending standards, the recent easing in housing credit growth and the abatement of strong price pressures" when deciding to lower the cash rate to a fresh record low.

That comment strongly implies that if the 25-basis-point rate cut, which has been passed on in full by most of Australia's major banks, re-stokes demand and prices in the housing market then it will be the last delivered by the RBA in this cycle.

The other major domestic uncertainty surrounding the outlook for interest rates is wage growth.

The Reserve Bank has observed that the most comprehensive measure of take home pay - average earnings per hour - actually declined in the December quarter and was little changed over 2015.

"This growth is comparable to the period of weakness in the early to mid-1990s at a time of considerably higher unemployment," the bank noted.

On the one hand, this phenomenon could be temporary, as the process of workers leaving higher-paid resources jobs and returning to lower paid employment elsewhere in the economy winds up over the next year or two.

On the other, the bank appears to have cut rates because it is concerned the low wages growth could lead to reduced spending causing economic growth to miss its forecasts.

"The forecasts assume that households will respond to near-term weakness in income growth by reducing their rate of saving to sustain their consumption growth," the RBA explained.

"If, however, a longer period of low wage growth leads households to lower their expectations for income growth over the longer term, household consumption may not increase to the extent forecast."

Chinese rebound: Short-term gain for long-term pain

Beyond Australia's shores, the RBA's main focus remains China.

While it noted a recent apparent pick-up in Chinese economic activity, driven by housing market stimulus from the Chinese Government, and the concurrent rebound in iron ore prices, the RBA is mindful that this boost could be short-lived.

"The sustainability of the present improvement in property markets is uncertain and it appears that substantial excess capacity persists in the manufacturing sector, including the steel industry," it cautioned.

"One risk is that the pursuit of the authorities' near-term growth targets is likely to increase already elevated levels of debt and could potentially delay addressing the problem of excess capacity in the manufacturing and resources sectors."

For those reasons, and because of imminent further increases in iron ore supply from Australia and Brazil, the Reserve Bank's economists are assuming that iron ore and coking coal prices will not be sustained at current levels.

It is a prediction that is at odds with the Federal Government's budget, released on Tuesday, which based its forecasts on an iron ore price set close to current spot market trading.

However, with oil prices rising from recent lows, the RBA does expect LNG prices to follow, meaning Australia's terms of trade - the prices of the nation's exports relative to its imports - is likely to remain where it is now by the end of the two-year forecast period.