The central bank will adjust the cash interest rate from its "exceptionally" low level when the time is right, Reserve Bank of Australia Governor Glenn Stevens says.
Mr Stevens noted that debt futures markets are currently pricing in a rate rise by the end of 2009.
The Australian dollar rose to a 2009 peak of $US0.8472 from around $US0.8420 before the comments as investors priced in better chances of a rate hike before the year end.
The RBA Governor said he did not "want to give any particular steer on timing", saying the bank will adjust monetary policy "in a timely fashion, when the time is right".
Mr Stevens also said the current rate level was an emergency setting and that the RBA would tighten once the emergency has passed.
"On the timing of when we might adjust policy, that's an issue about which one keeps an open mind, at this point obviously," he told the House of Representatives Economics Committee meeting in Sydney today.
"It's an emergency setting."
Mr Stevens said it's possible the nation will face another quarterly contraction in gross domestic product (GDP) by year end.
He said the most likely outcome over the June and September quarters was "sluggish output'' with not a lot of growth.
"It's in fact even possible we'll get another contraction some time in the next couple of quarters,'' he said.
But Mr Stevens said the Australian economy had remained "resilient" despite the global recession, with economic activity being boosted by both foreign and local factors.
"Exports have been remarkably strong," he said.
"For Australia, they grew over the six months to March, whereas for most countries exports fell sharply over that period.
"Further growth appears to have occurred in the June quarter.
"This reflects the strength of Chinese resource demand, as well as some other factors."
RBC Capital Markets senior economist Su-Lin Ong said his remarks were decidedly upbeat in nature.
"He highlighted the improvement in global financial markets, a levelling out in global activity, and substantial improvement in confidence,'' she said. "The statement also signalled that the domestic economy and labour market has surprised the RBA to the upside although there may be some soft quarters ahead as the fiscal candy is withdrawn.
"Notwithstanding the usual caveats, the usually cautious Governor Stevens' confidence was abundantly clear.''
Mr Stevens said domestic demand had performed well in the first half of 2009, with consumer spending rising, and housing credit increasing along with home prices.
"Some of this strength is likely to be temporary, the result of fiscal measures that have a finite life," he said.
"We are assuming, for example, that consumer demand, and first-home buyer demand for finance, will be softer in the second half of the year."
Mr Stevens said while there was considerable uncertainty surrounding the economic forecasts outlined in the RBA's recent Statement on Monetary Policy, the current level of historically low interest rate could be lifted if those estimates on the economy bore fruit.
The RBA has forecast gross domestic product (GDP) to grow by 0.5 per cent in calendar 2009 and by an annual 2.25 per cent in 2010.
In May, the central bank had forecast GDP to shrink by 1 per cent in 2009.
The cash rate currently is at a 49-year low of 3 per cent.
"Nonetheless if things continue to look like they will turn out in that fashion, there will come a time when the exceptional monetary stimulus in place at present will no longer be needed," he said.
"It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels.
"The timing and pace of those adjustments, if and when they come, will be a matter of careful consideration, taking into account all the relevant factors, including what might be happening with market interest rates."
Mr Stevens noted that economic conditions in the global economy have improved in the past few months.
"Things abroad hardly look rosy but they look distinctly better than they did a few months ago," he said.
AAP