The Reserve Bank of Australia (RBA) has lifted the cash rate by another 0.5 percentage points.
That means the rate will be 1.35 per cent, up from 0.85 per cent last month.
It is the second consecutive month of rate rises of that magnitude, marking one of the sharpest rate increases since the early 1990s.
RBA governor Philip Lowe said the central bank will continue to lift rates in coming months to withdraw stimulus from the economy.
"Today's increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic," Dr Lowe said on Tuesday.
"The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead."
More rate rises coming
Dr Lowe said the inflation outlook was complicated, globally and in Australia, with supply-chain disruptions, the war in Ukraine, severe local flooding and tight labour markets all contributing to capacity constraints.
He said the RBA would be paying close attention to the global outlook, and noted real household incomes were under pressure in many economies and financial conditions were tightening as central banks increased interest rates.
The RBA still officially expects Australia's inflation to peak at 7 per cent later this year, up from its current 5.1 per cent.
However, some economists are now questioning that forecast, given Tuesday's big rate hike.
"We have pencilled in another 0.5 percentage point rate hike in August after the release of another set of strong second quarter inflation data," said Marcel Thieliant from Capital Economics.
"And we now expect inflation to peak at 8 per cent and expect the cash rate to rise to 3.5 per cent.
"But we doubt that monetary policy will remain this tight for long. After all, we now expect house prices to plunge by 15 per cent from their peak in April which would mark the deepest downturn in Australia’s modern history."
Is the RBA less stressed than other central banks?
Despite the large rate hike, economists working at Australia's major banks say the RBA doesn't seem to be as impatient as other central banks.
That's because inflation in Australia is still lower than in other countries.
Gareth Aird from Commonwealth Bank thinks the RBA will keep lifting the cash rate until it hits 2.1 per cent by the end of this year, which may be enough to slow economic growth.
But that did not mean the RBA is panicking, he said.
"The RBA is not on a crusade to hasten a drop in the rate of inflation at all costs. Other central banks appear more impatient," Mr Aird said.
"The rate of inflation in Australia is not as high as many other comparable countries, and Australia also has a lower rate of wages growth. Our household sector is one of the most indebted in the world and the transmission mechanism from the policy rate to the real economy is much more direct due to the structure of our mortgage market," he said.
Citi's economics team says the RBA will be closely watching readings of "inflation expectations" after this, to see if people are losing faith in its ability to control inflation.
"The reaction functions of central banks globally has shifted towards ascertaining whether inflation expectations have become unanchored or not," they said.
Criticism of rapid rate increases
However, the RBA's decision to hiking interest rates rapidly has not been welcomed by everyone.
Peter Davidson from the Australian Council of Social Service said he understood the Bank's desire to lift rates away from emergency-low levels, but it had to avoid creating the expectation of another downturn.
"We call on the [reserve] bank to exercise patience and caution from here on and prioritise jobs over using the blunt instrument of higher interest rates to quickly bring inflation to heel," he said.
"That would crush the hopes of the 900,000 people still stuck on unemployment payments and 800,000 more who need more paid working hours but can’t get them.
"We call on the government, the RBA, unions, business and civil society to work together through the Jobs Summit to find less damaging ways to control inflation than increasing unemployment," he said.
