Australia's central bank raised interest rates for the second time in as many months as a rapidly improving economic outlook called for a further gradual withdrawal of emergency policy settings.
In a busy week of central bank meetings around the world, the hike affirms the Reserve Bank of Australia's willingness to act alone and tighten policy settings while rates in other Group of 20 economies remain stuck at close to zero.
But the RBA left some analysts speculating that policy could be on hold in December by saying that interest rate rises in October and November would work to temper inflation and ensure a sustainable upswing in the economy.As expected, the RBA lifted its cash rate target by 25 basis points to 3.50%, the highest level since February, and repeated its October comment that it is "prudent to lessen gradually the degree of monetary stimulus". The modestly sized rate rise signals the RBA is set to move with caution as it returns policy settings to normal through 2010.
Treasurer Wayne Swan told reporters in Brisbane that even after the hike, interest rate settings remain expansionary, and will continue to support growth. It would be a mistake to expect interest rates to remain at "50-year emergency lows" indefinitely, Swan said, flagging more rate hikes over time.
Australia is the only major economy to have avoided recession during the global financial crisis and the RBA has signalled it wants to normalise rates, albeit slowly.
Economists say that implies a cash rate of around 5.0%. The RBA expressed confidence that inflation will continue to moderate, helped by a strong Australian dollar, which will damp price pressures.