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Economists predict Australia's central bank could raise interest rates even further because of the strong economy, possibly as early as next month.
The Reserve Bank of Australia yesterday raised the official cash rate by a quarter of a percentage point to 6.75 per cent. This marks the sixth
increase since the 2004 election and will add around a further A$40 ($47.64) per month to the average standard variable mortgage repayment.
This is the first time the bank has raised rates during an election campaign, and Prime Minister John Howard has been bracing for the political fall-out from another rate rise.
The decision - following the central bank's monthly board meeting - comes after last month's strong inflation figures and a series of other indicators suggesting price pressures are becoming overheated.
The bank said inflation had increased and that price pressures remained in the economy even though wages growth has been contained.
"By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent," governor Glenn Stevens said.
He said demand and output growth had also risen and there were few signs of that strength diminishing.
"Growth in labour costs has been contained so far, and high levels of investment are adding to productive capacity in some sectors," Stevens said. "The rise in the exchange rate will help to contain pressure on prices.
"But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to two to three per cent in the medium term."
Economists said the central bank's concerns indicated interest rates could rise further in coming months.
HSBC chief economist John Edwards said the bank was likelyto raise rates again in March next year, as strong demand and a tightjobs market put upward pressure on inflation.
Economists were unanimous in their expectation that rates would rise yesterday.
"No doubt, the increase in underlying inflation in the September quarter left them with little alternative," Edwards said. "And they cited that as a major reason along with of course the strength of other indicators we've seen in the Australian economy and employment."
Edwards said problems in the US sub-prime mortgage market were unlikely to affect Australia, which would make further interest rate rises in 2008 a possibility.
Interest rates have now climbed for the 10th successive time since May 2002 and six times since the last 2004 federal election, when the Government argued that interest rates were lower under the Coalition than Labor.
- AAP