The central bank has issued an upbeat assessment of the economy, but that raises the likelihood of an interest rate hike if inflation gets too high.
The Reserve Bank of Australia said economic growth will get a boost from the lower Australian dollar and stronger activity in the housing and retail sectors.
Investment in the mining and resources sector is forecast to peak some time this year and a pick up in the non-mining sectors of the economy is needed to maintain economic growth.
"Retail sales .... point to a pick up in household consumption growth in the December quarter and measures of consumer sentiment remain a little above average levels," the RBA said on Friday.
"Leading indicators suggest that dwelling investment is likely to have increased in the (December) quarter and will grow further over the coming months."
Consequently, the RBA kept the cash rate unchanged after its board meeting on Tuesday, and it also and flagged the end of the rate cutting cycle that has seen the cash rate fall to 2.5 per cent, from 4.75 per cent in November 2010.
"On present indications, the most prudent course is likely to be a period of stability in interest rates," RBA governor Glenn Stevens said in a statement accompanying the decision on Tuesday.
The RBA reiterated that comment in the statement on Friday.
The bank increased its economic growth forecast by a quarter of a percentage point for the year to December 2014 to be between 2.25 per cent and 3.25 per cent.
It also said the inflation rate is likely to peak between 2.25 per cent and 3.25 per cent between now and June 2015.
The bank aims to keep inflation between two to three per cent over the course of the economic cycle.
Commonwealth Bank chief economist Michael Blythe said the RBA forecasts still have inflation meeting that medium term target.
"We see inflation risks to the high end of the new inflation forecast ranges," he said.
"The RBA is still placing weight on the idea that slower wages growth will eventually produce a step down in what has proved to be very sticky domestic inflation rates."
JP Morgan Australia chief economist Stephen Walters said a cash rate hike isn't necessarily on the cards just yet.
"The bottom line is that RBA officials seem happy that the previous easing is working and don't expect a move in the policy rate any time soon," he said.
"Nor do we, although we still include a single rate cut in our forecasts for later this year.
"As the RBA readily admits, growth will be sub-trend for a while yet .... so the jobless rate has further to rise.
"Our forecast for the peak in joblessness, at 6.5 per cent around mid-year, probably is higher than the Banks, which is not disclosed explicitly in today's statement."
