The Reserve Bank is worried that it is running out of room to slash interest rates further and that wages growth is "no longer expected to pick up".

Key points: RBA left interest rates on hold at the record low 0.75 per cent in early November

RBA left interest rates on hold at the record low 0.75 per cent in early November Inflation has fallen below the central bank's target for the 14th straight quarter

Inflation has fallen below the central bank's target for the 14th straight quarter Workers are unlikely to get major pay rises for at least the next two years amid a weak economic environment.

Australia's central bank has forecast subdued wage growth of just 2.3 per cent up to the end of 2021, a major reason it was still prepared to ease further if needed.

However, it is also concerned that additional rate cuts might backfire by hurting consumer sentiment — a signal it might sit on its hands for at least a couple of months.

In its quarterly statement on monetary policy, released on Friday, the RBA said the country's $1.95 trillion economy was "gradually coming out of a soft patch."

Global financial markets seem to have passed a "trough of pessimism," it said, painting a more upbeat picture of the world economy than in its previous review in August.

Earlier this week, the RBA decided to keep rates on hold "to allow time to assess the effects" of the cuts.

It follows three successive rate cuts in June, July and October to a record low of 0.75 per cent.

Record low rates expected to drive recovery

Markets have recently scaled back their expectations of a rate cut in December, though a move next year is still seen as around a 60 per cent chance.

RBA governor Philip Lowe provided some detail into the board's thinking in October — when it cut rates for the third time, this year.

At the time, he said the RBA was "mindful that rates were already very low and that each further cut brings closer the point at which policy options might come into play".

"It also took into account the possibility that further easing could unintentionally convey an overly negative view of the economic outlook, or that the usual channels of policy transmission might be less effective at low interest rates."

The board still assessed at the time that an even easier policy would be helpful for the economy via a lower exchange rate, higher asset prices and a boost to household incomes.

Record-low rates were one reason the RBA expects economic growth to pick up to 2.75 per cent next year — before lifting to 3 per cent in 2021. Both figures are unchanged since its August review.

The near-term GDP forecast was trimmed to 2.25 per cent this year (down from 2.5 per cent in August).

However, inflation is likely to remain low and unemployment will stay around current levels over the next couple of years, a case for policy to remain accommodative for a long time.

"Spare capacity is expected to remain in the labour market over the next couple of years," Dr Lowe said.

"Consistent with this outlook wages growth is low and shows little sign of picking up," he added.

"Faster wages growth would be needed for inflation to be sustainably within the 2-3 per cent target range."

Inflation underperforms (again), but house prices surge

But the closely-watched measure of underlying inflation undershot the RBA's target range (2 to 3 per cent) for a 14th straight quarter, the longest stretch since the series began.

The central bank said slow wages growth was likely to keep domestic inflation pressures contained — and that inflation is unlikely to hit the bottom of that target range until 2022 at the earliest.

Furthermore, the RBA noted the recent surge in home prices, especially on Australia's east coast, saying the turnaround has come "sooner and faster" than previously expected.

Home loan approvals have been increasing lately, while auction clearance rates have been trending higher too.

Helped by a pick up in home prices the RBA expects household consumption to rise gradually, though "the timing of the turnaround, the speed of its trajectory and the influence of the housing market on it" are key uncertainties.

The RBA also said that the downturn in the housing market which began in 2017 had a more "pervasive effect" on the economy than it had expected.

Reuters