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CANBERRA - The Reserve Bank of Australia yesterday raised interest rates to their highest level in more than 10 years, sparking a drop in the kiwi dollar.
The RBA lifted the cash rate to 6.5 per cent from 6.25 per cent - the highest level since November 1996.
It was the first rate rise since last November.
The move narrows the gap in interest rates between Australia and New Zealand, prompting the kiwi to fall A0.27c to close at A88.81c.
New Zealand's official cash rate is 8.25 per cent.
The kiwi has fallen 2.5 per cent against Australia's currency since July 26, when Reserve Bank Governor Alan Bollard said his fourth rate increase this year should be enough to contain inflation.
The rise in the Australian cash rate will add around A$50 a month to the average A$250,000 home loan with standard variable mortgage rates set to rise to 8.3 per cent from 8.05 per cent.
Economists had anticipated the move following an unexpected spike in inflation during the June quarter.
This marks the fifth rate rise since the 2004 election, and the ninth since 2002, and comes just months before a federal election is expected to be held.
The RBA cited economic data showing faster growth in demand and activity, high capacity utilisation rates, lower unemployment, strong household and business confidence, strong demand for finance and the ongoing boost to the economy from soaring commodity prices.
The clincher was most likely, as the RBA noted in its statement, that "these conditions have been accompanied recently by higher-than-expected underlying inflation".
The RBA mentioned the recent turbulence in global markets, something that had cast doubt on the likelihood of a rise, but said "developments to date do not appear to have changed significantly the broader global outlook".
The big question now is whether the RBA might jack rates up even further but there was nothing in the announcement to provide a pointer. The RBA will release its quarterly statement on monetary policy on Monday.
Against the US dollar, the kiwi lost the same amount of ground as against the aussie, shedding US0.27c to close at US76.12c.
- AAP