Australia has became the first advanced economy to raise interest rates since the global financial crisis and promised more rises to come, boldly declaring the risk of recession over.
The central bank announced a rise of 25 percentage points to 3.25%, lifting rates off a 49-year low after an aggressive round of cuts credited with helping fight off the worst global downturn since the Great Depression.
'That basis for such a low interest rate setting has now passed, however,' Reserve Bank of Australia governor Glenn Stevens said in a statement.
'With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board's view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,' he added.
Australia is the only major Western nation to have avoided a recession in the worldwide slump and posted growth of 0.6% in the three months to June - the best in the developed world.
The RBA had slashed the rate from 7.25% last September to 3% in April, the lowest since 1960, while the government unveiled a massive $AS 70 billion stimulus to keep the economy turning.
Treasurer Wayne Swan resisted calls to scale back the cash injection, despite loud protests from the opposition that it is no longer needed.
'To do so would rip the rug out from under the recovery and see more workers and more businesses hit the wall,' Swan warned.
The RBA said Australia's economy had been boosted by the growth of China, a key market for shipments of commodities like iron ore, but warned that demand could soften as stimulus starts to run dry.
'Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,' Stevens said.
'Some spending has probably been brought forward by the various policy initiatives. As those effects diminish, these areas of demand may soften somewhat,' he added.
