The Reserve Bank has lifted interest rates to their highest level in 15 years.
The RBA increased the cash rate by 0.25 percentage points to 4.6 per cent, up from 4.35 per cent.
The decision will put further pressure on homeowners with large mortgages, while people with high-interest savings accounts could earn more interest if their banks pass on the increase.
The increase was unanimous, with all nine members of the RBA board voting in favour.
The RBA has been increasingly concerned about bringing inflation back to its 2 to 3 per cent target range.
In July, headline inflation was running at 3.5 per cent annually, while underlying inflation was 3.6 per cent.
The RBA aims to keep inflation around 2.5 per cent over the medium term.
In its statement, the board said economic growth and inflation had both been higher than expected, while global developments were adding to price pressures.
The conflict in the Middle East has pushed up global energy prices, while strong demand linked to artificial intelligence has contributed to higher prices for technology-related goods.
Some Australian businesses are also facing higher costs and increasing their prices or considering doing so.
The RBA said higher interest rates were needed to reduce pressure on the economy and bring inflation back towards its target.
“The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing,” it said.
“But inflation is still too high and the Board judged that, in light of recent developments, a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period.
“The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed,” it said.
The decision comes one day before the Australian Bureau of Statistics is due to release its September quarter inflation figures.
The RBA said it did not want high inflation to become entrenched in the Australian economy and left open the possibility of further rate increases if needed.
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