Interest Rate Hike Spells Gloom for Australian Homeowners

A rate increase by Australia's central bank is putting a heavy burden on many of the nation's homeowners. Rates have been increased to more than seven percent, in a move aimed at curbing rising inflation. Phil Mercer reports from Sydney.

Australia's central bank has raised its key interest rate to its highest level in 12 years, in an attempt to combat inflation.

The hike takes the cost of borrowing to 7.25 percent.

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

Although that might seem a relatively small amount, there have now been a dozen rate increases in the last six years.

Many mortgage holders in Australia will be feeling the pain and others simply cannot afford to take out a loan to buy a house.

"I can't afford one, to be honest. I've got a family of two sons and I can't afford to pay a mortgage," says a man.

"I have to increase my work hours to five days a week, just to keep on top of the mortgage. So, it's been a big struggle," says a woman.

"I pay 1,200 on the mortgage, so I had to work very hard," says a taxi driver. "I had to cut down so much from the food shopping for the mortgage and that's what's happened to us. That's me but what about the others? They can't even afford to eat."

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

Market analysts believe further increases are likely in the months ahead.

Tuesday's increase was widely expected.

The Reserve Bank is using interest rates to fight inflation in the Australian economy.

Inflation means that the value of wages goes down and it takes more money to buy goods and services.

Australia has experienced more than a decade-and-a-half of solid economic growth, thanks largely to a commodities boom fueled by exports to China and India.

Analysts say the economy is overheating and that interest rates rises are needed to reduce strong domestic demand, which has driven up prices.

The Australian Prime Minister Kevin Rudd says combating inflation is a priority.

"The key challenge for us is what can we do about it," he explained. "And, when it comes to try to bring down some pressure on interest rates, what we must do therefore is bring down some of the pressure on inflation, which means in the upcoming budget we have got to do everything we can to take some of the pressure off unnecessary government spending and that is what we believe is the responsible thing to do."

The decision to raise interest rates in Australia goes counter to the trend among major international central banks, which have either cut rates to try to stimulate their economies or are considering reducing the cost of borrowing.