Pre-election Australian rate rise

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Australian interest rates are to rise to an 11-year high just weeks before the government of Prime Minister John Howard seeks re-election.

The central bank opted to lift rates by a quarter point to 6.75% in an effort to contain inflation, the first such move during an election campaign.

It said the risk of rising inflation outweighed the effects of the current credit crisis on the global economy.

The governing Liberal Party is trailing rivals Labor in the polls.

Low unemployment

Although the Australian economy remains buoyant, analysts said the timing of the move, coming so close to the 24 November poll, could hurt Mr Howard's re-election chances.

Borrowing costs are now not far off the 7.5% level seen when Mr Howard won his first term of office in 1996.

The Board judged that a further increase in the rate was needed now in order to contain inflation in the medium term Glenn Stevens Reserve Bank Governor

Explaining its decision, the Reserve Bank of Australia said annual inflation was running at nearly 3% and was likely to exceed that level early next year.

Price rises are being driven by a tight labour market, with unemployment at a 33-year low.

The rate decision was expected by many analysts but still marks a contrast with other leading industrialised economies, such as the US, where rates are either on hold or being lowered to support consumer and business confidence.

The bank said it had weighed up the current instability in financial and banking markets before taking its decision and concluded that the impact on the Australian economy had "been less pronounced than elsewhere".

"Having weighed both the international and domestic information available, the Board judged that a further increase in the rate was needed now in order to contain inflation in the medium term," said Bank Governor Glenn Stevens.

The government has made the strong economy central to its re-election campaign while Labor has accused ministers of promising reckless tax cuts.