The Reserve Bank of Australia (RBA) yesterday lifted interest rates by a quarter of a percentage point to 7 per cent, bucking a global trend of cutting or holding rates.
Australia has become the only developed nation to divide itself from a trend of rate cuts or rate holds.
Counterparts from central banks in the US, Canada and England have cut interest rates to stem slowing growth while the European Union and New Zealand have kept rates on hold citing worsening inflation.
The RBA said in a statement that recent economic data pointed to significant inflationary pressures.
"Indicators of demand remained strong through the second half of 2007,"the RBA said.
"Reports of high capacity usage and shortages of suitable labour persist."
Recent consumer price index (CPI) data showed that inflation stood at 3 per cent in the December quarter, while underlying inflation was at 3.5 per cent. The RBA's target rate is between 2 per cent to 3 per cent.
The RBA said that short-term inflationary pressures would probably rise, but expected inflation to cool next year.
Housing industry association Master Builders Australia said that the rate rise would delay the housing recovery by making home ownership and rental rates less affordable.
Research firm Fujitsu Australia and New Zealand said that 300,000 homeowners may lose their homes over the next six months because of the rate rise combined with rising inflation.
