Australia's Howard faces election risk on rates

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CANBERRA, Oct 24 (Reuters) Australia's conservative government suffered a new election blow today when higher than expected inflation figures boosted the chance of an interest rate rise, undermining its political advantage on the economy.

Economists now expect the central bank to lift interest rates in early November, putting home-loan mortgage rates at the centre of the campaign for the November 24 election.

Prime Minister John Howard, struggling in the polls after 11 years in office, won his fourth election in 2004 with a promise to keep interest rates low. A rate rise in November would be the sixth since that election.

''If interest rates go up, it is always going to be a negative.

The only issue is how negative,'' Ian McAllister, professor of social sciences at the Australian National University, told Reuters.

He said the electoral impact might be small nationally, but a rate rise in key marginal seats could be crucial to the result.

Interest rates are a sensitive political issue in Australia, where home ownership is a national aspiration. Many of the seats needed to win an election are centred on mortgage-belt suburbs on the outskirts of the major cities.

The Reserve Bank of Australia (RBA) increased interest rates by 0.25 points to a decade-high 6.5 percent in August, while housing affordability has hit record lows, with new mortgages soaking up 31.7 percent of household income.

The RBA's measure of underlying inflation on Wednesday came in at 3 per cent for the September quarter, at the top of its 2 to 3 per cent target band.

The politically autonomous central bank has never before hiked interest rates during an election campaign, but Governor Glenn Stevens said in August it would be inappropriate for the bank's board to stop doing its job because of the looming poll.

COMMANDING LEAD With the centre-left Labor Party needing to gain 16 seats to take power, opinion polls give Labor leader Kevin Rudd a commanding lead over Howard after a week of campaigning.

The first Reuters Poll Trend of the campaign published on Wednesday found the government trailing Labor by 13.2 points on a two-party basis, where minority votes are distributed to the two main parties to decide an election.

If those figures were carried through to polling day, the government would be swept from power and Howard and several ministers could lose their seats.

Rudd, 50, has led every Poll Trend since becoming Labor leader in December 2006, with a highest lead of 19.2 points in mid-March.

The Poll Trend, which analyses the three main published polls, showed the Howard government clawing back some support after its May budget, but the comeback stalled in August when the RBA hiked interest rates to 6.5 per cent.

Treasurer Peter Costello dismissed suggestions that another rate rise would harm the government's re-election hopes.

''This election is very open. This election could still be won by either side of politics,'' he told reporters. ''There is still something like four and a bit weeks to go, and a lot can happen in four and a bit weeks.'' He said the central bank should concentrate on the lower annual headline inflation rate of 1.9 per cent, while Howard said the headline inflation rate was the lowest since late 1999.

Rudd, however, blamed government inaction for the higher than expected inflation data.

REUTERS ARB RAI1346

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