The Reserve Bank has maintained an easing bias while acknowledging that a sharp fall in the Australian dollar and previous interest rate cuts supported its decision to keep the cash rate on hold this month.
The RBA said in its July board minutes, released on Tuesday, that it regarded its "current stance of policy to be appropriate for the time being".
"The board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand," the RBA said.
The Reserve Bank's deliberations, which led to the cash rate remaining at 2.75 per cent, were interpreted by financial markets as being less dovish than its initial statement after the board meeting.
The Australian dollar lifted half a cent to US91.66¢, while markets pared back their expectations of a rate cut next month from an almost 70 per cent chance to a 54 per cent chance. The dollar was buying US91.82¢ late on Tuesday.
"Overall, the rates and currency outlook are intertwined," said Paul Bloxham, HSBC's chief economist for Australia. "Slower than expected rebalancing may see the need for further policy stimulus from the RBA but further weakness in the Australian dollar could obviate the need for further cuts."
TD Securities strategist Alvin Pontoh said the inflation comments "dilute the urgency for a near-term rate cut at the margin" and represented a "modest toning down" of its easing bias.
The RBA has emphasised the need for other sectors of the economy such as housing and retail sales to fill the gap left by a peak in the mining investment boom.
The minutes said previous rate cuts were helping to lift the housing market and fuel further growth in dwelling investment. But the RBA also acknowledged that domestic activity was growing below trend and the outlook for mining and non-mining investment remained uncertain.
"Mining investment was likely to remain high for some quarters, given the considerable volume of firmly committed work, even though it looked to be close to, if not past, its peak," the bank's board members noted.
"At some time beyond that, however, mining investment was expected to decline more rapidly."
Westpac economists said the RBA's "more downbeat" assessment of domestic economic conditions had been left out of the earlier statement, possibly as a tactical move to "buy time for more clarity around the currency and inflation".
The central bank added that it was too early to tell what the effects of a tightening in financial conditions in China would be on borrowing and economic activity. The minutes also came as the Asian Development Bank revised down its China growth forecast to 7.7 per cent and 7.5 per cent for this year and next year respectively.
The RBA said the Australian dollar "remained at a high level" and it would welcome a further fall to "help to foster a rebalancing of growth in the economy".