Australia's central bank caught out financial markets on Tuesday when it hiked the benchmark interest rate to 4.75%, saying a modest tightening is prudent as a pre-emptive strike against inflation.
The Reserve Bank of Australia, or RBA, says that the moderation in inflation is close to an end, and that the risk is towards higher inflation over the medium term.
The RBA says the Australian economy faces an expansionary shock from the highest terms of trade since the 1950s, led by demand for resources from Asia.
It also expects the labour market to tighten further.
