The latest rise in official Australian interest rates this week to 3.75 per cent underscores the strength of the economy, buoyed by still-strong Asian demand for its raw materials.

With the rise in commodity values, this year much of the world’s focus has been on Australia as a major beneficiary of this continued boom.

In mid October, Rio Tinto, the mining group, raised its iron ore production guidance for this year by between 5 and 7.5 per cent to 210-215 million tonnes .It also reported a 12 per cent increase in third-quarter output, producing 47.5 million tonnes of iron ore compared to 42.4 million in the same quarter a year ago.

Rio Tinto plans to spend billions on solidifying its core business and diversification as it shifts to a growth phase, and it plans to diversify and create an industrial minerals group, whilst still focusing on iron ore, copper and aluminium.

Iron ore production will expand 10 million metric tonnes each year through investment in more mines in Australia.

Metal prices have been on the rise since 2002, and in 2008, the majority of major metals hit record-high prices. Consequently, mining industry profit in Australia in 2002 was $4 billion, rising to $95 billion in 2008.

According to the World Steel Association, global steel production ran at an annualised rate of 1.278 billion tonnes in August 2009, which is up 26 per cent from the low in December 2008.

Business ties between China and Australia have been growing strongly, with Australian regulators approving more than one hundred investment proposals from China to acquire Australian businesses, since November 2007

Trade growth between China and Australia worth A$74 billion in 2008 has grown almost tenfold since1995.

Australia would very much like a free trade agreement with China and wants long-term supply contracts set up between resource producers and Chinese companies.

Discussions between the two countries faltered last December after Australia grew frustrated with China's unwillingness to give ground in key areas.

Business and diplomatic incidents tested the relationship when Rio Tinto refused to accept a $19.5 billion investment from Aluminium Corp of China, a state-owned company, in June. Then in July, China detained Stern Hu, an Australian national who worked for Rio Tinto, along with three Chinese Rio executives. Mr Hu was arrested on suspicion of violating commercial secrets and taking bribes.

In August, Uighur leader Rebiya Kadeer’s visit to Australia further increased the tension.

Chinese Vice-Premier Li Keqiang said during a recent visit to Australia that China is committed to a free trade agreement and that he aimed to “enhance mutual trust” and his visit was a strong gesture that helped return the relationship back to normal.

With the relationship between Australia and China back on track, talks on a free trade agreement are scheduled to resume in February, more than a year after they stalled.

So, what has been happening to the Australian economy in general?

Well, for a start, there was no recession and current GDP forecasts are currently 1.5 per cent in 2009/10 and 2.75 per cent in 2010/11.

On a secondary front, China is Australia’s largest source of overseas student enrolments, with more than 125,000 last year.

Net debt is now expected to peak at 10.0 per cent of gross domestic product, which is around $50 billion lower than expected in the May budget.

Unemployment is now expected to peak at 6.75 per cent, down from 8.5 per cent forecast in budget. Cash handouts of A$20 million in cash handouts have been given to consumers and it appears to have worked and household confidence is rising.

In addition, China’s demand for natural resources has also been rising, and these two factors no doubt contributed to the decision to raise borrowing costs from a 50-year low 3.75 per cent this week.

This further translates into spectacular gains for the Aussie dollar which has completed its longest run of monthly gains against the greenback since the 1980s.