The country's Reserve Bank raised rates to 4.75 % from 4.5%, surprising most analysts, The Associated Press reported.
Booming demand for Australian minerals from Asian countries including China and South Korea has stoked Australian inflation.
The bank said that the country's economy is facing a "large expansionary shock" because of the high prices of its mineral exports.
The Reserve Bank also sounded optimistic about the domestic and international economy.
"Global growth will probably ease back to about trend pace over the coming year as strong recoveries in the emerging world give way to a more sustainable pace of expansion and growth remains subdued in the United States and Europe," it said.
The Australian dollar strengthened after the interest rate decision, briefly trading above $1.