Australian PM's election hopes hit by rate rise

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CANBERRA, Nov 7 (Reuters) Australia's conservative government suffered a new election blow today when the country's central bank increased interest rates, undermining Prime Minister John Howard's promises to keep rates low.

The latest rise is the sixth since Howard won his fourth straight election in 2004, and means official rates are now at their highest since Howard's first year in office in 1996.

Howard, who is trailing in opinion polls ahead of the Nov 24 national elections, said he sympathised with homebuyers who would be hurt by the rate rise.

''I would say to the borrowers of this country who are affected by this change, that I am sorry about that,'' Howard told a news conference. ''I regret the additional burden that will be put upon them as a result.'' Howard has made strong economic management and A34 billion dollars (31 billion dollars) of tax cuts the central themes of his election campaign, but opinion polls continue to show the centre-left Labor party in the lead.

''The political problem for Mr Howard is he made a big deal about interest rates in the 2004 election. He was the one who gave this very strong message about interest rates,'' political analyst Nick Economou said.

The 0.25 percentage point rate increase to 6.75 per cent is the first time Australia's central bank has changed official interest rates during an election campaign, and follows a similar rate rise in August to contain inflationary pressures.

Australia now has the highest interest rates among western economies, apart from its neighbour New Zealand.

The rise comes as housing affordability has fallen to record lows, with average first home buyers needing to commit more than 31 per cent of their income to cover an average mortgage.

Australians are a nation of home buyers and rising home loan rates are a sensitive political issue, particularly in key outer-suburban electorates which are typically home to younger families working to buy their first homes.

The rate rise will add an extra A50 dollars a month to an average A300,000 dollars mortgage.

The government has spent the past week bracing for the rate rise, saying a Labor victory at the election would increase pressure on inflation and interest rates and undermine economic prosperity.

Howard today urged voters to continue to support his Liberal-National party coalition government, warning that the country's strong economy would be at risk and interest rates would rise further if Labor won power.

''If Labor wins this election, interest rates will be higher than if the coalition wins,'' Howard said.

Deputy Prime Minister Mark Vaile has put a home-loan calculator on his Web site (www.nationals.org.au), claiming homebuyers would pay about A700 dollars a month more for their loans under a Labor government.

However, a poll published earlier this week found only 12 per cent of voters would blame Howard for a rate rise, with 67 per cent saying it would be either the economy or international factors that would drive the central bank's decision.

REUTERS NC RAI2337

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