Illustration: Rocco Fazzari.

Illustration: Rocco Fazzari.

The Reserve Bank still has rates on hold, but consumer sentiment is the wild card. It doesn't get mentioned in the central bank's latest statement, but could decide when rates move, and in which direction.

There is no doubt the Reserve is determined to persuade households, businesses and investors that what they have got - a 2.5 per cent cash rate - is what they are going to get for a while longer. The last two paragraphs of its past three rate decision statements have used identical language to put the base case - that continued low rates are supporting demand and growth without threatening its 2-3 per cent inflation target.

There are some changes in tone on the edges. The Reserve has gone from observing in May that the Australian dollar is stubbornly high to complaining mildly about it, for example.

After trading between $US1 and $US1.05 in the first five months of 2013, the dollar fell to US86.7¢ by January this year, and then climbed back up above US90¢.

The currency was high by historical standards, it said a month ago, but its decline from last year's highs would still help the economy grow, albeit by less than before the partial rebound.

Its latest statement says again that the currency is high by historical standards, but says that is notable ''particularly given the further decline in commodity prices''.

Australia's biggest export earner, iron ore, would be front of mind. It fell in price by 13 per cent from $US106 a tonne to $US92.10 a tonne between the central bank's May and June meetings. The Australian dollar edged down by less than 1 per cent over the same time.

The Reserve notes that the resources investment boom has fuelled a surge in exports, but warns that they may not grow as strongly in coming quarters. More positively, it has gone from predicting that low rates would trigger a strong rise in housing construction activity to stating that that lift in housing construction ''is now under way''.

Overall, the central bank seems to be at least as confident as it was in May.

What it doesn't have anything to say about, however, is consumer sentiment - and consumer sentiment is Australia's new X-factor after the release of Joe Hockey's budget.

I have been covering budgets for more than three decades, and I have never seen one get the attention that this one has. Media groups are usually struggling to keep the story running until the Opposition Leader replies a few days later. However, the Hockey budget is still making headlines.

It is influencing household sentiment, for sure. The most closely watched sentiment index is curated by Westpac and the Melbourne Institute, and it fell by 6.8 points to 92.9 points after the budget.

Of those surveyed, 59 per cent of those surveyed said they expected the budget to financially hurt them.

ANZ's rival consumer sentiment survey rose slightly on Tuesday ahead of the Reserve's cash rate decision, but is still down 12 per cent since pre-budget leaks began.

Sentiment could be worse, and it could be better. A score of 100 denotes neutral sentiment on the Westpac-Melbourne Institute index. The index reached almost 124 points ahead of the global crisis, and bottomed out at just 79 points during the crisis. Consumers also tend to hate budgets initially, and then calm down.

The Hockey budget doesn't get its work done quickly, however. It tightens the fiscal screws more aggressively from next year onwards, and proposes cuts far beyond the usual four-year budget estimates period. It might have a more enduring impact on sentiment as a result, and be more likely to convert sentiment into an actual downturn in demand.

The Reserve had nothing to say about all that on Tuesday. It said - as it did in May - that consumer demand appeared to have been growing moderately.

Under the leadership of governor Glenn Stevens, the Reserve has not held off from moving rates at politically sensitive times. It underlined its independence in 2007 by announcing a cash rate increase in the middle of an election campaign.

Buying into a debate about the impact of the Abbott government's first budget before the evidence is in would be another thing entirely, however. The Reserve has wisely stayed clear.

It will, however, be watching closely to see if sentiment is a serious disruption.

The numbers so far are inconclusive. Building construction starts were better than expected in the March quarter, but building starts have more recently been weak.

Pre-budget retail sales edged up in April but were less than expected for the third consecutive month.

Reports to come on activity in May and beyond will decide whether the budget has poisoned the economic well. If it has, rates will be on hold for longer at least, and the currently lengthy odds on a rate cut will come in.

mmaiden@fairfaxmedia.com.au