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News News RBA deals election campaign rate rise
HOMEOWNERS have been hit with another interest rate rise, the first ever during an election campaign, as mortgage rates head to a 13-year high.

The rise of 25 basis points takes the official cash rate to 6.75 per cent.

The latest rise means mortgage variable interest rates will soon rise to 8.57 per cent, an 11-year high, up from 8.32 per cent.

On a $200,000 home loan over 25 years, repayments will jump by $34 a month.

The Reserve Bank board met yesterday and announced its decision today. The raise is expected to hurt the re-election prospects of Prime Minister John Howard, being announced in the middle of the federal election campaign.

The decision comes in the wake of last month's strong inflation figures and a series of other indicators suggesting price pressures are becoming overheated.

Australians have been dealt 10 interest rate rises in the last five years - and six times since the last election in 2004 despite Mr Howard's promise to keep interest rates low.

In a statement accompanying the rate decision, RBA governor Glenn Stevens said the pace of economic growth had increased and that both the consumer price index and underlying inflation were likely to be above 3 per cent in the first three months of next year.

"There are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist," Mr Stevens said.

"Growth in labour costs has been contained so far and high levels of investment are adding to productive capacity in some sectors."

He said the strength of the Australian dollar would help to contain price pressures, but demand would need to moderate if inflation was to be kept to the target in the medium term.

"Having weighed both the international and domestic information available, the board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term," he said.

Some analysts are forecasting interest rates will peak at 7.25 per cent within six months due to rising inflation and strong economic growth.

That would push variable home lending rates to 9.07 per cent and take official rates to their highest level in 13 years.

Westpac chief economist Bill Evans said he expected another rate rise in December and another next year.

"We also retain our expectation of a further rate hike in first half of 2008, pushing the rate peak to 7.25 per cent from our previous forecast peak of 7 per cent," Mr Evans said.

Other economists from the big banks - which are responsible for the bulk of Australia's home lending - agreed

"It now looks as though the Reserve Bank has considerably more work to do in order to dampen medium-term inflationary pressures," said economists at ANZ Bank, who predicted two more rate hikes in the first half of 2008.

The big banks have already hinted they may raise home loan rates more than any official rate rises given higher funding costs in the money markets.

The RBA set interest rates to keep inflation between 2 and 3 per cent and core inflation is hovering just above that band.

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