The Reserve Bank of Australia (RBA) reiterated that policy was "appropriate for the time being," in a brief statement after its monthly policy meeting. The central bank led the developed world in hiking 150 basis points between October and May.
It noted that the global background was "somewhat uncertain" but underlined that booming export earnings were lifting household consumption and driving strong business investment.
"You've got a big boost from incomes and the terms of trade, demand is quite strong, and capacity will be waning so inflation will head higher," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"They'll be on hold for a few months, but the next move is still up, probably in the first quarter of next year," she added.
A pause for a few months would be a relief to the minority Labor government which finally snatched victory on Tuesday with the support of a handful of independent lawmakers.
The Australian dollar eased on the RBA decision, which was widely expected, but remained not far from one-month highs.
Interbank futures imply there is only a slight chance of a hike in rates for the remainder of the year. Still, that is a marked change from a week ago when they were implying a real chance of a cut in rates.
Analysts are far more hawkish and see rates rising to 4.75 percent by Christmas and 5.25 percent by mid-2011.
"With private demand clearly taking over from public in driving the economy, there is absolutely no chance of a cut," said Annette Beacher, a senior strategist at TD Securities.
"The RBA has a quiet tightening bias," she added. "They can afford to relax for a few months, but the next move will be up."
The economy grew a brisk 1.2 percent in Q2, led by strong household consumption and surging resource exports to China and India. Asian demand is fueling investment in mining and LNG which will drive growth for a long time to come.
The revival in consumption is a challenge to the central bank, which has been hoping spending would stay subdued and leave room for mining to boom without creating inflation.
The country is being showered with cash from trade as voracious demand from China and India fuels huge price increases for Australia's two biggest exports, coal and iron ore.
Miners, confident the industrialization of over two billion people will suck in Australian resource exports for years to come, have embarked on a truly staggering investment binge.
The value of engineering work yet to be done has more than doubled in the past year to top A$86 billion, while firms plan to expand overall investment by a fifth in 2010/11 to A$123 billion. The RBA is all too aware that such investment plans are dominated by massive multi-year projects, like the A$43 billion Gorgon liquified natural gas field, which will go through to completion whether the global economy slows or not.
