In a politically charged decision, the Reserve Bank has lifted interest rates for the first time during a federal election campaign.
In a move that underscores its independence, the country's central bank raised its official cash rate by a quarter-point to 6.75 per cent, the highest rate in 11 years.
While the rate increase was widely expected after inflation picked up in the September quarter, the RBA's action will not be welcomed by both mortgage holders and the Coalition as it campaigns on its economic track record.
The Australian dollar spiked immediately on the announcent, rising from 92.79 US cents shortly before the announcement to 93.13 US cents by 9.35am.
The average standard variable mortgage of major lenders will rise to or near 8.57 per cent, adding about $50 to monthly repayments on an average $300,000, 25-year loan.
Today's rate rise was all but sealed after the RBA's own measure of underlying inflation came in at a higher-than-expected annual rate of 3 per cent - the top end of its preferred band in data released last month.
The higher rate may hamper efforts by the Coalition to claw back its deficit in the polls as the campaign enters its second half. During the 2004 campaign, Prime Minister John Howard promised that a re-elected Coalition Government would keep interest rates "at record lows".
Since then, they have been lifted six consecutive times, adding a total of $125 to monthly repayments on every $100,000 of debt.
Anticipating today's rate rise, Mr Howard has attempted to turn the issue to his advantage, arguing that his Government has the experience needed to handle the challenge of maintaining fast economic growth while keeping a lid on prices.
His challenger, Labor Party leader Kevin Rudd has countered that the Government has not done enough during its 11 years in office to combat the supply bottlenecks that are contributing to inflation.
Another inflation gauge from the TD Securities-Melbourne Institute this week showed the underlying rate of inflation surged to 3.2 per cent over the 12 months to October.
Before this morning's release, a Credit Suisse Index was pricing in a 92 per cent chance of a rate rise.
The dollar has risen in recent weeks against other currencies, particularly the US dollar, as investors bet that Australia's rates will rise relative to our major trading partners.
The Age, November 2007 By Peter Litras
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