Australian rates at 10-year high

Consumer debt levels have soared as have house prices

Australian interest rates are at their highest level for more than 10 years after the country's central bank raised them by a quarter-point to 6.5%.

The expected move was the first jump in the cost of borrowing since November.

The Reserve Bank of Australia said this would help to keep the annual inflation rate from rising above 3%, the top end of the government's target range.

A buoyant economy has put pressure on prices and led to record consumer debt levels, but unemployment remains low.

Mortgage pressure

Annual inflation rose to 2.75% in the second quarter of the year and analysts say there is little spare capacity in the economy with unemployment near a 30-year low.

There's every chance we will get another rate hike or two next year Warren Hogan, ANZ

"Based on these considerations, the board judged that a somewhat more restrictive monetary policy setting was required in order to keep inflation consistent with the target in the medium term," the bank commented.

Analysts said further rises could not be ruled out given that economic growth forecasts remained strong.

"It does not mean the rate tightening cycle is finished by any stretch," said Warren Hogan, head of market economics at ANZ bank.

"There's every chance we will get another rate hike or two next year."

The last time rates were as high as 6.5% was at the end of 1996.

Election calculation

Rising borrowing costs are problematic for Prime Minister John Howard who is seeking re-election later this year.

Responding to the bank's decision, Mr Howard acknowledged that many homeowners would be hurt by the move.

But he said tax cuts announced by his government earlier this year would help ease the burden on household finances.

Interest rates have been rising in most leading industrialised countries as policymakers try to contain inflationary pressures.