SYDNEY (AFP) -- Australia is braced for an interest- rate hike in the midst of an election campaign this week, an unprecedented event that economists say risks souring the central bank's relations with government.

Analysts say the expected rate hike could even undermine the Reserve Bank of Australia's independence if politicians decide leaving it with the power to tighten monetary policy in during future campaigns is too risky.
""Ideally, it would be preferable for interest rates to be left on hold during the election campaign lest they become politicised in a way that may ultimately threaten the independence of the Reserve Bank for no good reason,"" AMP Capital Investors chief economist Shane Oliver said.
The bank was formally given the power to set interest rates independent of government in 1996 and, until now, there has never been a compelling case for a rate rise in the lead-up to a poll.
But with inflation threatening to break out of the bank's 2.0-3.0 percent target band, financial markets believe there is sufficient reason for the bank's board to act when it holds its monthly monetary policy meeting Tuesday.
The problem is that campaigning for the November 24 election is in full swing and interest rates are a major concern for the mortgage-belt voters likely to decide the poll's outcome.
Conservative Prime Minister John Howard won the last election in October 2004 promising to keep interest rates low, but they have risen five times since then.
Howard, trailing the opposition Labor Party in opinion polls, does not want another rate hike less than three weeks from polling day hitting voters in the pocket and stirring memories of a pledge he failed to deliver.
Oliver suggested one solution was for the Reserve Bank to delay the rate hike, saying ""a month's delay in changing rates will have negligible economic impact.""
However, bank governor Glenn Stevens insisted last August that he would not hesitate to lift rates during the campaign if it was warranted, so the opposition will accuse him of pandering to the government if he fails to act.
Commsec chief equities economist Craig James said the Reserve Bank's decision would be seen as political, whether it lifted interest rates 0.25 percent or denied expectations and left them on hold at 6.5 percent.
""Certainly (leaving rates) would go against market consensus and indicate that the Reserve Bank was not a hostage of the financial markets,"" he said.
""But it could also expose the Reserve Bank to suggestions that political influence has been brought to bear.""
He said one way out of the bind would be for the Reserve Bank to leave rates unchanged but break with tradition and issue a statement explaining its reasons for doing so. Such statements are normally only released when rates move.
Either way, James said there could be consequences for the bank's future independence when the decision is announced on Wednesday morning.
""There is a good reason why previous Reserve Bank governors have left rates alone in previous election campaigns -- they have wanted to be out of the public gaze,"" he said.
""That practice may end in the coming week, the question being whether it is the first and last time.""