The RBA board met in Sydney on Tuesday to decide whether to lift rates from a 49-year low of three per cent, which has been in place since April this year.
"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," RBA governor Glenn Stevens said in his statement.
"This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
"The global economy is resuming growth. With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher," Stevens said.
Stevens acknowledged economic conditions in Australia had been stronger than expected and measures of confidence had recovered.
“Sentiment in global financial markets has continued to improve. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.Higher dwelling activity and public infrastructure spending will also start to provide more support to spending, he said.
"Overall, growth through 2010 looks likely to be close to trend.”
Stevens had repeatedly warned that the central bank would lift the cash rate from its "emergency" level at some point.
He told a Senate inquiry into the government's stimulus measures last Monday that he was concerned about creating imbalances in the economy by keeping the cash rate at an unusually low level for too long.
While a few market economists predicted the RBA would take the plunge this week, a majority believed it will hold off until November.
Last week, the International Monetary Fund (IMF) upgraded its forecasts for Australian economic growth to 0.7 per cent for 2009 and to 2.0 per cent for 2010. It was the only advanced economy expected to record growth in 2009.
"Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months," Stevens said.
And things could get worse for homeowners, according to some experts.
ANZ chief economist Saul Eslake has said the official cash rate is expected to rise to 4 or 4.5 per cent by the end of next year.
The global financial crisis was "almost if not completely over", and most parts of the economy no longer needed the support of very low interest rates, he told ABC Television.
If rates were left too low for too long, it could fuel a bubble in housing prices, he warned.
If the RBA left rates on hold, then banks would be unlikely to go it alone and raise their own rates because the cost of their funds was not moving much above the official rate, Mr Eslake said.Did you know...
- The Reserve Bank interest rate was 13 per cent in October, 1990, not the highest rate in history. See the RBA's interest rate or cash rate target for more information.
- The Reserve Bank interest rate reached 7.25 per cent in March 2008 before plummeting to a 49-year low in April 2009.
Rates on way to 4.5%: economist
Recent history of interest rates in the news
What do you think about the decision? Leave your comments below...
Update your news preferences and get the latest news delivered to your inbox.