SYDNEY (AFP) — Australia's central bank raised its key interest rate by 25 basis points Tuesday 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 had been widely expected and increases pressure on the new Labor government of 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 twelfth 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, whose government took power in November, has repeatedly blamed the previous conservative administration for allowing inflationary pressures to build and has pledged to prioritise 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 2.0-3.0 percent range, but in the fourth quarter of 2007 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," the central bank's 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."
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 2008.
The world economy was slowing and it appeared likely that global growth would be below trend in 2008, Stevens noted.
"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.
"The extent of that moderation is uncertain, however. As the board noted last month, a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time."
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.
"It's not as hawkish as it could have been and, I think, they're probably going to now sit and watch for a little while," he said.
Lehman Brothers chief economist Stephen Roberts also believed the rise could be the last for a while.
"It looks as if they are going to take a pause after this one because some of the wording is balanced when it relates to inflation," Roberts said.
But Craig James, chief economist at CommSec, would not rule out further rate increases ahead.
"Our economy is super strong at the moment, unemployment is at 33-year lows and there is a lot of global pressure putting upward pressure on prices, whether it be food, petrol, or commodities more generally," he said.
Australian share prices closed a little lower following the rate hike, with the benchmark S&P/ASX 200 down 25.5 points at 5,380.3.
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