The Reserve Bank of Australia (RBA) left interest rates on hold on Tuesday at a near 12-year high of 7.25 per cent but the central bank governor has hinted that rising terms of trade would add to inflationary pressures.

The RBA decision was announced on the same day the Australian Bureau of Statistics revealed Australia recovered from its worst-ever trade deficit in March thanks to a surge in resource exports.

RBA governor Glenn Stevens said in the statement that the outlook for demand and inflation was uncertain, as Australia's terms of trade added to spending.

"The rise in Australia's terms of trade currently occurring, which is larger than had been expected a couple of months ago, will work in the opposite direction," Mr Stevens said.

"It will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the Bank has been assuming for some months now."

Commonwealth Bank of Australia chief economist Michael Blythe said interest rates could rise again in 2008 as rising terms of trade stirred more inflationary pressures.

"I think it (the RBA statement) is more explicit about the terms of trade," he said.

"They've noted it in recent commentary but they haven't made the link to extra spending."

The RBA also said the outlook for demand and inflation was uncertain.

"Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation. On balance, the board's current assessment is that demand growth will remain moderate this year," it said.

"In the short-term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected.

"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.

Mr Blythe said the RBA, which lifted rates in February and March, would retain a tightening bias, which meant rates could rise again if demand failed to moderate.

"I think there's still a tightening bias there and presumably it wouldn't take too much to tip the debate the other way," he said.

"These terms of trade increases were bigger than they were expecting.

"They (the RBA) are relying on households and businesses not to spend that money."

The RBA's two preferred measures of underlying inflation rose by 4.25 per cent in the year to March, which was well above the central bank's longstanding two to three per cent target.

RBC Capital Markets senior economist Su-Lin Ong said the RBA needed to see further signs that demand was slowing to increase its confidence that inflation was falling back.

The bank had acknowledged there has been a "substantial" tightening in financial conditions, she said.

"It is clearly getting the signals it wants on the domestic demand front, but there are some real challenges on the inflation side," Ms Ong said.

"Demand is easing and it needs to get inflation back into target range.

"The RBA needs to see further signs of easing demand to feel comfortable."

But official rates would likely stay on hold for the "foreseeable future", she said.

"What it (the statement) tells you clearly is that there is still a fair bit of stimulus in the system, particularly in the terms of trade side," she said.

The central bank indicated that if inflation remained high and demand did not slow, then further interest rate rises could occur.

"If demand does not slow and inflation expectations remain high, absolutely there is a risk of further tightening," Ms Ong said.

ANZ Banking Group chief economist Saul Eslake said the RBA's statement indicated the central bank was willing to tolerate higher inflation for a period as long as domestic demand was slowing and wages growth remained constrained.

"They appear to be making the judgment that the substantial tightening in financial conditions and conditions in international financial markets will outweigh the impact of the rise in the terms of trade," Mr Eslake said.

"The clear message is what will trigger any further tightening in monetary policy is evidence that undermines their confidence that domestic demand is slowing as required."

The RBA's statement accompanying the decision said inflation "should decline over time provided demand evolves as expected".

It said that should inflation 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".

Inflation was at about four per cent and likely to remain there for the rest of the year.

Mr Eslake said inflation had the potential to "get built into people's wage demands" and how businesses set their prices.

"The danger in an inflationary spiral is that people start expecting higher inflation and factor it into the decisions they make about prices and wages," Mr Eslake said.

"If they were to be any sign ... then the bank would have problem and they are saying they would have to deal with it."

Mr Eslake said the decision to leave rates on hold was also a sign the central bank was separating its decision-making from the latest inflation figures released via the quarterly consumer price index.

"The Reserve Bank is now, I think, almost explicitly downplaying the significance of the quarterly CPI to decisions about monetary policy in favour of the strength or otherwise of domestic demand and about wages," he said.

Mr Eslake said it remained his view that interest rates had peaked and would begin falling from the middle of next year.

"If anything were to happen in the next three months, it would be a tightening but I would put the probability of that 20 per cent or less," Mr Eslake said.