Australia lifted interest rates to 4% today and warned they would continue higher as growth gets back on track and unemployment stabilises after the financial crisis.
The central bank said rates would need to return to average levels after Australia escaped the global downturn without entering recession due to strong stimulus spending and huge Asian demand for its resources.
'The board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average,' Reserve Bank of Australia (RBA) governor Glenn Stevens said.
'Today's decision is a further step in that process,' he added.
Australia was the first developed economy to lift rates after the world's biggest financial shock since the Great Depression, raising them 25 basis points to 3.25% in October and twice again before pausing last month.
The Reserve Bank is now unwinding its emergency cuts of late 2008 and 2009, when interest rates were slashed by 425 basis points to a five-decade low of 3% as the world economy tanked.
'In Australia, economic conditions in 2009 were stronger than expected, after a mild downturn a year ago. The rate of unemployment appears to have peaked at a much lower level than earlier expected,' the bank said.
'Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year,' it added.
Treasurer Wayne Swan acknowledged pain for home-owners as mortgage payments rise but said Australia's economy, dubbed by analysts 'the wonder from Down Under', was 'the envy of the world'.
'The Reserve Bank has flagged for some time that rates will rise as the economy recovers,' Swan said.
Australia announced emergency stimulus worth over $70 billion last year including straight cash hand-outs and grants for first-home buyers as well as infrastructure spending.
Growth slowed to just 0.2% in the third quarter, down from 0.6% over the previous three months. Figures for the December quarter will be revealed later this week.
Reserve Bank officials are confident that Australia is on the verge of a mining boom which will last years, if not decades, as Asian powers such as China and India expand and industrialise.
