Page last updated at 07:55 GMT, Tuesday, 4 March 2008

Australian rates at 12-year high

BHP Billiton iron ore mine in Australia
The rising price of iron ore is fuelling income and demand

Australia's central bank has raised its key interest rate to its highest level in 12 years, as it attempts to combat rising prices.

The Reserve Bank raised rates by 0.25% to 7.25% in a bid to dampen domestic demand and keep a lid on inflation.

The move was anticipated, but will put increasing stress on home owners struggling to pay their mortgages.

It is the 12th rate rise in Australia in the last six years and some believe there is more to come.

Home owners with a US$280,000 (141,000) mortgage will face extra repayments of about $50 a month.

Many mortgage holders in Australia will be feeling the pain, while others simply cannot afford to enter the property market, says the BBC's Australia Correspondent Phil Mercer.

There is tentative evidence that some moderation in household demand is beginning to occur
Glenn Stevens, Reserve Bank Governor

It is estimated that 300,000 Australians risk losing their homes if interest rates continue to rise.

"I pay 1,200 [Australian] dollars a month (562; $1,116) on the mortgage," one Sydney homeowner told the BBC.

"I have to work very hard. I have to cut down so much, on food, on shopping, to pay the mortgage," he said.

Commodities boom

The decision bucks the trend among many major international central banks, which have been cutting rates to try to stimulate their economies in the face of a slowdown.

Australia has experienced more than 15 years of solid growth, thanks largely to a commodities boom fuelled by exports to China and India.

The Australian Reserve Bank expects that the rising price of iron ore and coal, Australia's biggest exports, will bring higher revenues and keep demand strong.

Its governor, Glenn Stevens, said that inflation was high last year and remained a threat for 2008, despite signs the world economy was slowing and recent turmoil in financial markets.

"There is tentative evidence that some moderation in household demand is beginning to occur," he said. "The extent of that moderation is uncertain, however."

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