The Reserve Bank of Australia has lifted interest rates for the first time this year, with more increases expected in 2010 as economic growth gathers pace, economists say.
The central bank raised the cash rate by 25 basis points to 4.0 per cent following its board meeting on Tuesday.
It was the fourth board meeting of the past five where the RBA had raised the cash rate by 25 basis points. The bank stayed on hold in February.
In a statement, RBA governor Glenn Stevens said the domestic economy continued to improve and there was a need to return rates to more appropriate levels.
"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," Mr Stevens said.
"Today's decision is a further step in that process."
Economists consider trend growth in the Australian economy to be around 3.0 to 3.25 per cent.
The RBA uses monetary policy to keep inflation within its target band of two to three per cent over the economic cycle.
"It (The RBA) based its decision squarely on the strength of the domestic economy, where the fall in unemployment and a range of business surveys `suggest growth in the economy may have already been at or close to trend for a few months'," National Australia Bank senior economist Spiros Papadopoulos said.
"Strong resource investment, solid housing credit growth and rising house prices were also cited by the RBA as key factors in its decision."
RBC Capital Market senior economist Su-Lin Ong said the RBA confirmed the likelihood of more rate hikes and that borrowing rates needed to be near average with an economy expanding at trend pace.
Ms Ong said these rates were around one percentage point below their decade average before Tuesday's rates decision.
"As Australia moves to an above trend pace of growth this year underpinned by a recovery in the terms of trade with limited spare capacity in both the goods and the labour market, these key borrowing rates will need to move to at least their longer run average if not higher,"Ms Ong said.
"Accordingly, we remain comfortable with our year-end target of five per cent, but the much harder task is trying to figure out which month the RBA is likely to move."
Mr Stevens said the economy was stronger than expected after a mild downturn a year ago.
"There are some signs that the process of business sector de-leveraging is moderating, with the pace of decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers," he said.
"Investment in the resources sector is very strong."
Commonwealth Bank senior economist Michael Workman said the RBA would keep lifting rates in 2010, but not every month.
"There is still another nine months this year and out of nine meetings we are expecting four 25 basis point rises," Mr Workman said.
"They can gradually lift rates as conditions strengthen."
He expects a cash rate of five per cent by the end of 2010.
Repayments on an average $300,000 mortgage for 25 years would increase by around $47 a month on a quarter of a percentage point rise.
