The Reserve Bank of Australia (RBA) left its cash rate unchanged at 2 percent on Tuesday, judging that the prospects for the economy had improved recently.

The RBA's decision was along expected lines. None of the economists polled by Reuters had expected a change.

The central bank noted that a moderate expansion in the economy continued despite a sharp fall in commodity prices that has hurt Australia's trade sector.

"While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year," the central bank said. "This has been accompanied by stronger growth in employment and a steady rate of unemployment."

The RBA said that monetary policy needed to be loose at a time when inflation in Australia remained low and the economy had some spare capacity.

"Low interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative."

Paul Bloxham, chief economist for Australia and New Zealand at HSBC, told CNBC that there were very few changes in the RBA's statement on that of November's, adding only that there had been a pickup in business credit growth, which indicated an improvement in business conditions and confidence.

"Even though iron ore prices have come down through the months, and the Aussie dollar's rallied a little bit, the RBA seems unperturbed by this at the moment," Bloxham said.

"I think the message they are trying to deliver is they're on hold for the moment. Interest rates are already low, the economy is rebalancing, it's happening slowly. They want to try and bolster confidence at the moment by not delivering any changes to the view that they put forward last month."

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