Australia's strong growth prospects have prompted the Reserve Bank of Australia (RBA) to lift interest rates by a quarter of a percentage point to 7.25 per cent.
Higher commodity price forecasts and a tight labour market are strengthening the country's prospects while stoking inflation, RBA governor Glenn Stevens said in a statement yesterday.
Inflation was likely to go even higher by the end of the year before cooling in 2009, he said.
"The board took account of events abroad and developments in financial markets," Stevens said.
"The world economy is slowing and it appears likely that global growth will be below trend in 2008.
"Recent trends in world commodity markets, however, have further strengthened prospects for Australia's terms of trade."
Yesterday's rate rise was the 12th increase of the official rate since 2002.
Australia's commodity export earnings are predicted to rise 30 per cent to a record $180 billion for 2008/2009 on the back of demand from China, according to the Australian Bureau of Agricultural and Resource Economics.
The RBA noted that there were signs that household demand was becoming softer but had not slowed enough.
The 2007 annual consumer price index showed that inflation stood at three per cent while underlying inflation was at 3.5 per cent. The RBA's target rate is between two per cent to three per cent.
Australia has become the only developed nation to divide itself from a trend of rate cuts or rate holds.
The United States, Canada and the United Kingdom have cut interest rates to stem slowing growth while the European Union and New Zealand have kept rates on hold.
