The decision was widely expected by analysts and underlines Australia's quick recovery compared with other developed countries. Most have yet to respond to signs the global economic crisis has eased by raising borrowing costs.

The Reserve Bank of Australia board decided at its monthly meeting to raise the cash rate a quarter point to 3.5 percent. A month earlier, Australia became the first major economy to raise interest rates since the outbreak of the crisis when the bank hiked its key rate by a quarter point from a 50-year low.

Gov. Glenn Stevens said in a statement explaining the decision that inflation "will probably not fall as far as earlier thought" and "will probably rise somewhat over the coming year."

"With the risk of serious economic contraction in Australia now having passed, the board view is that it is prudent to lessen gradually the degree of monetary stimulus that was in place when the outlook appeared to be much weaker," Stevens said.

Australia has survived the downturn better than many countries thanks to strong demand from China for its mineral resources and huge government stimulus spending.

Stevens said the global economy has resumed growing. While the expansion was expected to be modest in most countries, "prospects for Australia's Asian trading partners appear to be noticeably better," he said.

China's strong growth was having a significant impact on other economies in the region, he added.