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Thu, Nov 08, 2007 - Page 10 News List

Australia raises key interest rate to an 11-year high

AP , SYDNEY

The Reserve Bank of Australia lifted a key interest rate to an 11-year high of 6.75 percent yesterday, a move analysts say could hurt Australian Prime Minister John Howard's shot at re-election later this month.

After meeting on Tuesday, the bank said it chose to lift the benchmark cash rate by 25 basis points from 6.5 percent after recent data showed underlying inflation surging above the bank's target range of 2 percent to 3 percent.

A 33-year low in unemployment, strong commodity prices and robust growth in nonagricultural sectors of the economy added to the case for a hike.

In a statement, Reserve Bank Governor Glenn Stevens said the pace of economic growth had increased and that inflation was likely to be above 3 percent in the first three months of next year.

The decision yesterday was the 10th interest rate hike rise since May 2002 and fell just shy of the 7.5 percent rate in place when Howard's government first took power in 1996.

The rate increase was the first ever during an election campaign and was the sixth consecutive rise since Howard was re-elected in October 2004 on a promise of keeping interest rates low.

Australians are scheduled to vote on Nov. 24 and polls indicate that the main opposition Labor Party will defeat the 11-year old coalition government.

Many economists predict the Reserve Bank will lift rates again, possibly as early as next month, given the strength of the economy and the rising pace of inflation.

The Housing Industry Association's chief economist Harley Dale said around 100,000 Australian households would fall into financial stress as a result of the latest interest rate rise.

New home buyers were devoting on average 25 percent of their household incomes to their mortgages after the last election, Dale said. That figure would jump to around 33 percent on the back of the latest hike.

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