June 6 (Bloomberg) -- Australia's central bank kept its benchmark interest rate unchanged at a six-year high after three increases last year tempered inflation.

Reserve Bank of Australia Governor Glenn Stevens announced in Sydney today he had left the overnight cash rate target at 6.25 percent for a sixth meeting. All 24 economists surveyed by Bloomberg News expected no change.

Stable borrowing costs may buoy consumer confidence and fuel a housing recovery that could stoke a 16-year economic expansion. The economy grew at the fastest pace in more than three years in the first quarter, the government said today, which may ignite inflation and prompt an interest-rate increase in early 2008.

``In the near term, rates will be on hold because inflation is unlikely to rise materially,'' said Adam Carr, senior economist at UBS Australia Ltd. in Sydney. ``Having said that, we expect growth in domestic demand to be very strong, and a rate increase could be likely in the first half of 2008.''

The Reserve Bank does not issue an explanatory statement when it leaves interest rates unchanged. The economy expanded 1.6 percent in the three months ended March 31 from the previous quarter, the Bureau of Statistics said in Sydney, for a 3.8 percent annual rate.

Australia's dollar bought 84.21 U.S. cents at 12:19 p.m. in Sydney, the highest since 1989, from 83.77 cents before the decision was announced. The yield on the benchmark 10-year bond was rose 2 basis points to 6.10 percent. A basis point is 0.01 percentage point.

Global Rates

Annual inflation cooled to 2.4 percent in the first quarter, dropping to within the bank's target of between 2 percent and 3 percent for the first time in a year.

That followed quarter-point interest-rate increases in May, August and November last year, moves that are now being echoed in the U.K. and Europe.

The European Central Bank has raised its benchmark interest rate seven times since December 2005, most recently in March this year. All 51 economists in a Bloomberg News survey expect another quarter-point increase to a six-year-high 4 percent when the bank announces a decision today.

The Bank of England's benchmark rate is at a six-year high of 5.5 percent after four increases in the past year, most recently on May 10. Most economists in a Bloomberg News survey expect no change after the bank's June 7 meeting.

The U.S. Federal Reserve hasn't raised its benchmark rate since June 2006, though its ``policy is still oriented toward control of inflation, which we consider at this time to be the greater risk,'' Fed Chairman Ben S. Bernanke said in March.

Consumer Confidence

Australia's interest-rate increases have curbed inflation without putting a brake on the economy. First-quarter growth was fueled by business investment and household spending.

Consumer confidence reached a record in May, according to Westpac Banking Corp. and the Melbourne Institute, stoked by the fastest employment growth in 18 years and a 4.4 percent jobless rate in April, the lowest since November 1974.

The jobs boom is driven by construction and mining companies expanding to meet soaring Asian demand for iron ore, nickel and coal. That investment may boost exports and add to economic growth this year.

Economists expect the government will report first-quarter growth of 1.2 percent at 11:30 a.m. in Sydney today.

``Given the overall momentum in domestic demand and the prospect of some pickup in exports, it appears likely that growth of the non-farm economy will remain relatively strong in the period ahead,'' the Reserve Bank said in its quarterly statement on May 4.

Core Inflation

The low jobless rate is both a source of consumer confidence and a potential threat to inflation, because it may push up wages.

``The labor market is tight and the Reserve Bank will have work to do down the track,'' JPMorgan's Kerr said.

Thirteen of 24 economists surveyed by Bloomberg News on June 1 predict a rate increase in the first three months of next year.

Underlying inflation, which strips out volatile price movements, will slow to 2.5 percent by the end of 2007 before picking up to between 2.5 percent and 3 percent by mid-2008, the bank forecast in May. The bank's measure of core inflation was 2.7 percent.

In contrast to Australia's slowing inflation and quickening growth in 2007, first-quarter growth cooled in Europe and the U.K. following the interest-rate increases.

Europe's annual economic growth was 3 percent in the first quarter, slowing from 3.3 percent previously. The U.K.'s economic growth was 2.9 percent, cooling from 3 percent in the previous three months.

The European and British central banks are damping inflation. The inflation rate in the nations sharing the euro currency was 1.9 percent in April, unchanged from a month earlier, and was 2.8 percent in the U.K. in April from 3.1 percent the previous month.

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By Hans van Leeuwen