Sydney  - Interest rates in Australia were unchanged at 3.25 per cent Tuesday after the central bank decided further relaxing monetary policy would increase inflationary pressures.

It was the first monthly meeting in five months that ended with the board of the Reserve Bank of Australia (RBA) not cutting the rate it charges banks for borrowing.

The pause comes after figures were released showing higher prices for petrol and food were stoking inflationary pressures. The RBA's target is for an upper limit of 3 per cent. The annual inflation is running at 3.1 per cent.

The RBA's decision also reflects a surprise narrowing of the deficit on the current account of the balance of payments as the cost of imports falls because of the slowing economy.

In the quarter ending in December the deficit closed by around one third from the quarter before.

Chief economist at nabCapital Rob Henderson said the bright spots in the macroeconomic picture suggest Australia might indeed have proved to have skirted recession when the gross domestic product figures are released for the December quarter later this week.

"Now we still think a small negative is likely, but around zero looks to be the best guess," he said.

RBA Governor Glenn Stevens said the world economy was very weak and the Australian financial system was relatively strong.

"On the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere," he said.

Commonwealth Bank economist John Peters said Stevens had opted for a pause rather than a change in direction. "We think the Reserve Bank will probably err on the side of caution and cut rates again in the next couple of months by at least half a per cent, which would take the cash rate down to something with a two in front of it," he said.

The Australian dollar has jumped in value in the wake of an announcement that preserves the differential between the interest rate in Australia and in other countries. The Aussie dollar added about half a cent, to 64 US cents. (dpa)