The threat of Donald Trump's tariffs loomed large over the Reserve Bank as it made the call to keep interest rates on hold, warning that US measures could lead to higher inflation.
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Minutes from the central bank's April 1 meeting, released on Tuesday, revealed the board was concerned about a "two-sided risk" to inflation following the US tariffs announcement and its global impact.
"Weaker global demand and the possibility of trade diversion away from the United States could reduce inflation in Australia," the board's minutes read.
"But a larger exchange rate depreciation or more substantial global supply disruptions could increase inflation.
"The effect of (tariffs) on sentiment and economic developments in Australia was not yet clear."
The April meeting was held just days before the US president unveiled wide-ranging tariffs on goods from dozens of countries, including Australia.
Mr Trump later announced a 90-day freeze on any tariffs above a 10 per cent baseline rate after global share markets went into freefall amid fears the measures could lead to a recession.
The Reserve Bank chose to keep interest rates on hold at 4.1 per cent at its April meeting, but there is growing expectation the cash rate will be cut when it meets in May.
The board's minutes said the tariff implications could lead to further complications for the global economic outlook.
"The extent to which these international developments would affect the Australian economy was a further source of uncertainty and depended on a range of factors," the minutes said.
"The effects on GDP growth and inflation in Australia could be relatively modest.
"This reflected Australia's limited direct trade exposure to the United States, additional policy support in China and Australia's flexible exchange rate."
The April meeting was the first since the Reserve Bank cut rates for the first time in almost five years in February.
While the bank said the financial situation had eased following the 25 basis point cut, board members said conditions were still restrictive.
The board said recent monthly inflation data painted a positive picture for quarterly data falling back to the bank's target band of two to three per cent.
Trimmed mean inflation, which excludes volatile price movements, is the preferred measure for the Reserve Bank to see if inflation is at sustainable levels and whether interest rates should be cut.
The Reserve Bank also expressed optimism at recent sales figures.
"The pick-up in spending growth among components not affected by sales events suggested there had been a genuine improvement in underlying momentum," the minutes read.
"More recent indicators signalled that some of this pick-up had been sustained."
While a drop in labour force participation in February and the unemployment rate holding steady at 4.1 per cent was a surprise for the board, it said there were multiple factors behind the move.
"Given this was only one month's data, it seemed possible that the declines were a result of volatility in the monthly labour force data rather than an indication of softening in labour market conditions," the minutes said.
The central bank will meet on May 19 and 20 before handing down its next rates decision.
Australian Associated Press
