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Thu, Aug 09, 2007 - Page 10 News List

Australian central bank raises rates pre-election

PRICES PRESSURE June figures showed inflation running at 2.75 percent, near the top of the central bank's target of between 2 percent and 3 percent

AFP, SYDNEY

Australia's central bank hiked interest rates 0.25 points to a decade-high 6.5 percent yesterday in an unprecedented pre-election move that the government admitted creates a political headache.

Confirming market expectations, the Reserve Bank of Australia (RBA) tightened monetary policy for the first time since November to counter rising inflation and keep it within the bank's 2 percent to 3 percent target band.

"The [RBA] board judged that a somewhat more restrictive monetary policy setting was required in order to keep inflation consistent with the target in the medium term," governor Glenn Stevens said.

The independent RBA has not raised interest rates in the months leading up to an election since it began announcing changes to monetary policy in 1990.

CREATE PAIN

Prime Minister John Howard, who faces an election before year's end, acknowledged the rate rise would create pain in the mortgage-belt households vital to his conservative government's chances of retaining power.

"I'm aware and the government is aware that this decision will hurt some homebuyers, we're very conscious of that," Howard told reporters.

The rate hike is the ninth in succession and the fifth since Howard won the last election in October 2004 on the pledge of "keeping interest rates low."

"Today's rise is the cause of a number of factors and I accept that I will be criticized and the government will be criticized," he said, adding that rates remained lower than before he won won office in 1996.

The opposition center-left Labor Party, which has a strong lead in opinion polls, said Howard had shredded his credibility with voters and his 2004 interest rate pledge was returning to haunt him.

"The core problem Mr Howard has on the economy is credibility -- credibility coming from his undeliverable promise at the last election," Labor leader Kevin Rudd told reporters.

FORCED TO ACT

Westpac senior economist Bill Evans said stronger-than-expected June quarter inflation data had forced the RBA to act, regardless of the political implications.

"I think they had to prove their independence, though we never doubted it," he said. "They could not afford to look through such a sharp rise in inflation."

The June figures showed core price inflation (CPI), which excludes volatile food and energy prices, running at 2.75 percent annually, near the top of the central bank's target band.

"The high CPI outcome for the June quarter indicated a less favorable near-term outlook, with the implication that any further increases in inflation would take place from a higher starting point than previously envisaged," Stevens said.

RECENT TURMOIL

Stevens said the bank did not feel the recent turmoil in world markets caused by a shakeout in the US sub-prime mortgage market had significantly changed the bullish outlook for the global economy.

"Even with the US slowing down, forecasts of global growth have recently been revised upward," he said.

"High world commodity prices remain an important source of stimulus to Australia's national income and spending," he said, referring to the unprecedented Chinese demand for raw material that has created a boom in Australia's resources sector.

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