The Reserve Bank of Australia has raised the cash rate by 0.25 percentage points to 0.35 per cent following Tuesday's monthly board meeting, coming after last week's strong inflation figures.
It is the RBA's first rate increase since November 2010 and after holding the rate at a record low 0.1 per cent since November 2020.
RBA governor Philip Lowe said the board judged that now is the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected," Dr Lowe said.
"There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."
Figures released last week showed annual inflation rising 5.1 per cent and underlying inflation increasing to 3.7 per cent - well above the RBA's two to three per cent target.
"This rise in inflation largely reflects global factors," Dr Lowe said.
"But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices."
A further rise in inflation is expected in the near term.
The RBA's central forecast for 2022 is for headline inflation of around six per cent and underlying inflation of around 4.75 per cent.
By mid 2024, headline and underlying inflation are forecast to have moderated to around three per cent.
"These forecasts are based on an assumption of further increases in interest rates," Dr Lowe said.
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."
The governor is holding a rare press conference at 4pm AEST.