The sharemarket recorded its biggest weekly gain in over a year, while global bond markets held on to recent gains.
Local gold miners were back in favour as gold prices rebounded from recent lows. The price of gold has now recovered half of its recent losses, closing the week near $US1473 an ounce.
The banks were in strong demand for most of the week, all climbing by at least 3 per cent. Westpac closed the week at a record $32.57.
But concerns were raised about the outlook for economic growth after Australia's inflation rate rose by less than expected in the March quarter. The news prompted Treasurer Wayne Swan to say that the country could be in the grip of deflation.
For the week, the benchmark S&P/ASX200 jumped 165.6 points, or 3.4 per cent, at 5097.5, while the broader All Ordinaries jumped 159.8 points, or 3.2 per cent, at 5082.7. It was the biggest gain for the market since September 2011.
Australia's quarterly inflation rate rose by less than expected, coming in at just 0.4 per cent in the March quarter, against an expected 0.7 per cent. Economists said it was a surprising figure because the first quarter of the year is usually one of strong seasonal price increases.
It fell so low this week - annualised, the six-month inflation rate is 1.2 per cent - that Mr Swan said he was concerned the Reserve Bank would rethink its economic outlook.
"The gap between actual and expected outcomes reflected an extraordinary degree of retail price discounting and smaller than expected price rises in some seasonal items like education and health," Commonwealth Bank chief economist Michael Blythe said.
"Inflation is sufficiently tame for the RBA to implement another rate cut if demand conditions weaken."
It comes after World Bank chief economist Olivier Blanchard said last month that industrialised countries ought to consider temporarily raising their inflation targets to 4 per cent to help pay for their large public debts.
It was reported this week that the Reserve Bank plans to invest some of Australia's foreign currency assets in China for the first time. It was flagged as part of a move to deepen financial ties with the country, Australia's largest trading partner.
It intends to hold 5 per cent of its foreign currency assets in China. The bank's currency reserves are worth about $38.2 billion, according to its website.
For the week, the banks had a stellar run. Commonwealth Bank gained $2.06, or 3 per cent, at $70.84; Westpac jumped $1.34, or 4.3 per cent, at $32.57; National Australia Bank rose $1.18, or 3.8 per cent, at $32.63; and ANZ rose $1.47, or 5.2 per cent, at $29.88.
Rio Tinto gained $1.48, at $55.80, after the mining company lodged an appeal in the NSW Supreme Court against a decision to prevent it from expanding a coal mine.
This is an interesting court case, because the judge heard evidence that an unrealistic economic model was being used to support the miner's claim that scores of thousands of jobs would be created by the mine expansion.
Newcrest Mining gained 40¢, at $17.05, as the gold price rebounded. The rally came despite the miner flagging cuts to its workforce.