Australia's central bank raised interest rates yesterday, saying it was concerned that inflation might not slow down due to high world oil prices and damage from Cyclone Larry.
Officials worried about the fallout, particularly for homeowners, from the one-quarter percentage point increase to 6 percent.
But while that is the highest rise since early 2001, Australian Prime Minister John Howard said that the nation's economy remains strong, and the increase wasn't as large as some had feared.
"It's a decision that is a consequence of the strength of the economy and also, of course, a consequence of the very high fuel prices which we are experiencing all over the world," said Howard, who on Tuesday described rising oil prices as "the greatest worry of my political life."
The decision was made by the Reserve Bank of Australia's board at its monthly meeting on Tuesday.
"Overall the board's assessment ... was that underlying inflation in the period ahead was likely to exceed previous forecasts," bank Governor Ian Macfarlane said in a statement.
The move had been widely expected after government data released last week revealed annual inflation had climbed a percentage point to 4 percent in the three months ending in June due largely to the high cost of oil and a 250 percent jump in the price of bananas because a cyclone flattened the crop in Queensland state in March.
Without the temporary influences of fuel and fruit price spikes, Macfarlane said the underlying inflation level was just under 3 percent.
The bank adjusts interest rates to keep inflation between 2 and 3 percent.
"Given these circumstances, the board judged that an increase in the cash rate was warranted in order to contain inflation in the medium term," Macfarlane said.
The Urban Development Institute said the rate hike will force more people into an already tight rental market.
"A decision to raise current interest rates at this time will have the impact of eroding housing affordability even further," institute national president Grant Dennis said.
Commonwealth Bank economist Craig James said although warranted, he hoped the rate rise would be the last in the current cycle.
He told Sky New TV the increase was "very much as the market excepted, and really we hope this will be the last interest rate hike that we will see."
"Twenty-five basis points will clearly hurt families and will clearly slow down the economy," he said.