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Australian interest rate hits 12-year high

Australia's central bank raised its key interest rate by 25 basis points yesterday to a fresh 12-year high of 7.25 percent in a bid to curb inflation amid robust economic growth.

The Reserve Bank of Australia's move was expected and increases pressure on the Labor government of Australian Prime Minister Kevin Rudd as homeowners brace for higher mortgage payments with food and fuel costs already rising.

"This is a difficult day for working families -- added to the other costs of living pressures it makes it very tough indeed," Rudd told a news conference.

It was the fourth 0.25 percentage points rate hike in seven months and the 12th since May 2002 as huge Chinese raw material demand boosts resource-rich Australia's growth. Last month's hike set the earlier 12-year high.

Rudd has repeatedly blamed the previous conservative administration for allowing inflationary pressures to build and has promised to prioritize the fight against rising prices.

"There is no silver bullet with any of the measures that we've announced and it will take a long time to turn around, but we are determined to prosecute this course of action," he said.

The central bank aims to keep inflation within a 2 percent to 3 percent range, but in the fourth quarter last year the annual underlying core inflation rates were around 3.5 percent.

"This adjustment was made in order to contain and reduce inflation over the medium term," bank Governor Glenn Stevens said in a statement.

"Inflation is likely to remain relatively high in the short term, and will probably rise further in year-ended terms, before moderating next year in response to slower growth in demand," he said.

Stevens said domestic demand was appreciably higher than the growth of the economy's productive capacity over the year, while labour market conditions remained strong into early this year.

The world economy was slowing and it appeared likely that global growth would be below trend this year, Stevens said.

"Recent trends in world commodity markets, however, have further strengthened prospects for Australia's terms of trade," he said.

There was tentative evidence that some moderation in household demand was beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat, Stevens said.

National Australia Bank chief economist Alan Oster said the tone of the bank's statement showed it remained concerned about inflation but that the risk of further increases had moderated.

Lehman Brothers chief economist Stephen Roberts also believed the rise could be the last for a while.
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