The Reserve Bank of Australia has lifted the cash rate by 50 basis points, the largest single increase in more than 20 years.
In a recently released statement, the RBA board decided to increase the cash rate target from 0.35 per cent to 0.85 per cent.
The board also increased the interest rate on Exchange Settlement balances by 50 basis points to 0.75 per cent.
The 50 basis point hike was the largest single increase since February 2000.
This is the second consecutive month the RBA lifted the rates to respond to inflation with the nation's interest rate increasing by 25 basis points to 0.35 per cent in May.
RBA monetary policy decision governor Philip Lowe said inflation in Australia had increased significantly and was expected to increase further with a decline towards the 2-3 per cent range next year.
"While inflation is lower than in most other advanced economies, it is higher than earlier expected," he said in the statement.
"Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices.
"Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.
"As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today's increase in interest rates will assist with the return of inflation to target over time."
Dr Lowe said the board expected to take further steps in the process of normalising monetary conditions in Australia over the months ahead.
"The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market," he said.
"Today's increase in interest rates by the board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
"Given the current inflation pressures in the economy, and the still very low level of interest rates, the board decided to move by 50 basis points today."
Federal treasurer Jim Chalmers said the rate rise combined with “skyrocketing” cost of living would get harder before it gets easier.
“Australians expected higher interest rates today, but this doesn’t make this news any easier for them,” Mr Chalmers said.
"The rate rise means an increase of $87 per month on the average $330,000 mortgage. On a new mortgage the figure could be almost double that at $157 per month.
“Today’s decision, in addition to the pressure it will put on family budgets, will also make it more expensive for the Commonwealth Government to service that trillion dollars of debt.
“We need to be honest and upfront with the Australian people about the nature, the severity and the magnitude of the inflation challenge we must confront.”
He said the strength of the labour market was a plus on an increasing list of economic negatives.
