Australia's central bank yesterday lifted its key interest rates 25 basis points to 7 percent -- its highest level since 1996 -- as it struggles to fight inflationary pressures.
Reserve Bank of Australia Governor Glenn Stevens said there was evidence of "significant inflation pressures" amid strong demand and reports of labor shortages and high capacity usage.
Stevens said inflation had been higher than expected a few months ago, with the CPI inflation on a year-ended basis picking up to 3 percent in the December quarter and underlying measures at about 3.5 percent.
"In the short term, inflation is likely to remain relatively high and will probably rise further in year-ended terms, though the bank expects it to moderate somewhat next year," the bank chief said in a statement.
"In future meetings, the board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2.0-3.0 percent target," Stevens said.
The central bank's decision will frustrate home-owners already struggling to meet mortgage repayments after six rate increases over the past three years amid rising food and fuel costs.
Labor Prime Minister Kevin Rudd, who came to power in November and has pledged to make curbing inflation his top priority, said the interest rate rise would hurt families.
"The reality of modern life in Australia is there that is no such thing as a small interest rate rise and after 10 interest rate rises in a row, this one will really hurt," he told reporters in Canberra.
Rudd said the inflationary pressures had been building for some time and blamed the previous conservative government for not addressing the skilled labor shortage and infrastructure bottlenecks holding back exports.
He said his government would press ahead with tax sweeteners worth A$31 billion (US$28 billion) promised before the election but would also deliver a budget surplus of 1.5 percent of GDP, slash costs and try to boost savings.
Economists said the rate rise was unlikely to be the last for the year.
"Today's move, which was widely expected, is almost certainly not going to be the last in the current tightening cycle," ANZ senior economist Mark Rodrigues said.
ICAP senior economist Matthew Johnson said the central bank's statement left open the possibility of raising rates again as soon as next month.
"Even though they cite slower growth they also say it's not really going to affect us because we're going to have another leg up in our terms of trade," he said.
"It's a very hawkish statement and I think they're a 50 percent chance to raise rates again in March," he said.
But NAB Capital Markets chief economist Rob Henderson said there was no "loaded gun for March."
"They say that they will be evaluating further policy action over coming meetings, implying they are in no rush to tighten again," Henderson said. "They do not see themselves as behind the curve."
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