Australia's central bank reduced the cash rate to 3% in September to stave off chances of recession [AFP]

The Reserve Bank of Australia announced the rise on Tuesday, making Australia the first major Western nation to lift interest rates since the global financial crisis.

The central bank cut the cash rate aggressively from 7.25 per cent last September to three per cent to prevent the country from following major economies into recession.

It had left the rate unchanged at three per cent - the lowest since 1960 - since April.

Weak expectations

Glenn Stevens, the central bank governor, said in a statement that "in late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed".

He said: "That basis for such a low interest rate setting has now passed, however."

Australia is the only major Western nation to avoid a recession in the downturn and posted growth of 0.6 per cent in the three months to June.

"The RBA had widely advertised it was near to edging up rates from their extraordinary lows, and now it's done so," Rory Robertson, an interest rate strategist at Macquarie, the financial services organisation, said.

"It will be a gradual move from an emergency rate of 3.0 per cent to a still-easy 4 percent.

"If everything goes well over time, then we could get back to a more normal five per cent in the next year or two."

Pre-emptive policy

Rates in the US, the euro zone, Britain, Canada and Japan are all at or under one per cent.

Such pre-emptive policy largely reflects the strengths of Australia's economy, which boasts a sound banking system and strong demand from China for its commodity exports.

Australia was the only developed nation to grow in the first half of this year.

That helped Wayne Swan, the treasurer, sound sanguine on what was be an unpopular move in a country obsessed with home ownership.

"The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery," he said.

Warren Hogan, chief economist at banking services organisation ANZ, said: "We've got what looks like a gradual tightening process in train, probably by another 25 basis points next month, and then another couple of times early next year.

"They will probably get rates up to four to 4.25, and then they will pause.

"You may not see rates back to the four to six per cent level until well into 2011."

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