REUTERS

Australia's central bank Tuesday said it will likely hike interest rates as it works to contain inflation in the face of an unprecedented Asia-driven mining boom and improving world economy.

The Reserve Bank of Australia (RBA) last lifted its official cash rates in November, and since then has kept them on hold at 4.75 percent at each of its monthly meetings on monetary policy.

But the minutes from its May 3 meeting reveal the bank noted that underlying inflation had troughed and was expected to increase over time Ä putting it at the top of the bank's 2.0-3.0 percent target band over the next few years.

“Members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target,” the bank said.

The markets had been expecting a less dovish assessment and the comments pushed the Australian dollar around a third of a US cent lower to US$1.0549.

“Following the very hawkish quarterly statement, there's was a lot of speculation that maybe these minutes would be more hawkish, but they looked a little bit more balanced,” said RBC Capital Markets economist Su-Lin Ong.

The RBA said the global economy had grown solidly in early 2011

despite the impact of the Japanese earthquake and tsunami, with growth in China and elsewhere in emerging Asia strong.

And this above-trend growth in the world economy was boosting commodity prices, thereby supporting income growth and investment in Australia's booming resources sector, it said.

“While there were many uncertainties about the world economic outlook, the central scenario was for a continuation of above-trend growth,” the minutes said.

“Growth in Australia was expected to be relatively strong over the next few years, with the unemployment rate moving lower.”

The bank said that while Australia's summer of natural disasters, including massive floods and the monster Cyclone Yasi had affected inflation, pushing up the price of fruit and vegetables, this was likely a temporary effect.

With a moderation in inflation in Australia now appearing to have run its course, the forecast for underlying inflation over 2011 had lifted slightly to around 3.0 percent, it said.

Underlying inflation was expected to remain at that level for 2012, with the soaring Australian currency helping offset inflation pressures on some items, but would likely rise above 3.0 percent after that, the bank added.

Meanwhile unemployment, now at its lowest level in more than two years at 4.9 percent, is expected to decline as domestic growth builds, supported by a boom in investment.

Australia was the first major economy to lift interest rates after the global financial crisis and its centre-left Labor government now believes the resource-rich “Wonder from Down Under” will be the first to return to surplus post slump. - Sapa-AFP