In a momentous decision, particularly during a federal election campaign, the Reserve Bank Board has announced the first rate rise in 11 years and warned there are more to come.
The official cash rate has been raised by the central bank by 0.25 percentage points to be 0.35 per cent.
Economists had expected a more modest 0.15 point increase at this meeting, particularly coming in the middle of a federal election campaign.
The RBA Board expects headline inflation of about 6 per cent for 2022 and underlying inflation of around 4.75 per cent, dropping to about 3 per cent by 2024.
"These forecasts are based on an assumption of further increases in interest rates," Reserve Bank governor Philip Lowe said.
"... The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. 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."
ANZ head of Australian economic David Plank said a 40-point increase next month, to take the cash rate target to 0.75 per cent, "seems a distinct possibility".
Labor's treasury spokesman Jim Chalmers said the Prime Minister's economic credibility was "already in tatters, now it's completely shredded" shortly after the new rate was announced.
"Everything is going up except wages and now interest rate rises are part of the pain," he said in a statement.
Highly indebted borrowers, particularly those with home loans, will be impacted by the rise from a record low of basically zero, at 0.1 per cent. Official rates were slashed in 2020 as an emergency response to the pandemic.
The move is designed to curb surging inflation, which is running at an annual rate of 5.1 per cent.
The unemployment rate, which is at 4 per cent, is expected to decline to about 3.5 per cent by early 2023 and remain around this level, according to the RBA board.
The official cash rate was last raised in November 2010. The last time interest rates rose during an election campaign was in 2007.
MORE ELECTION NEWS
Ahead of the rate rise, Prime Minister Scott Morrison tried to dampen any effort to tie the decision to his economic management, a key issue in the campaign.
He said inflation is up due to broader global issues at play, including the war in Europe, COVID in China and global supply chain disruptions.
"Australians know the pressures that we're facing here in Australia are real," Mr Morrison told reporters as toured the marginal Labor seat of Dunkley.
"They are overwhelmingly being determined by things beyond Australia. And what they do know is our government has put up an economic shield for Australians, Australian businesses, Australian jobs, Australian incomes to get us through one of the worst crises we've seen in a generation."
When specifically asked on Monday about whether the rise will hurt the Coalition's chances, Mr Morrison recoiled.
"It's not about what it means for politics. I mean, sometimes you guys always see things through a totally political lens. I don't. And Australians don't," he said.
Also ahead of the Reserve Bank announcement, Federal Labor insisted the Prime Minister is responsible for the economy and pointed to people facing a "triple whammy" of falling wages, skyrocketing prices and the interest rate decision.
Labor leader Anthony Albanese said rising rates would add further pressure to household budgets, but on Labor's key cost of living measures - cheaper energy, childcare and healthcare - he could not confidently say they would effective with inflation running high.
Mr Albanese pivoted to attacking the Prime Minister, saying Mr Morrison was the architect of low wages growth.
"This government isn't even trying to address cost of living pressures," he said.
"What we know is that interest rate rises will put more pressure on families."
Jason Clare noted Labor's Help to Buy packages have been welcomed by a number of industry groups, including Master Builders and the Property Council of Australia.
He said the sole purpose of the scheme was to get Australians into housing who would never have been able to access the property market prior.
Labor's campaign spokeswoman, Katy Gallagher, said the Prime Minister's macro explanation does not take in the full picture.
"The point we're making is the Prime Minister doesn't have a plan to deal with his own cost of living crisis that has occurred on his watch," she told the ABC's RN Breakfast.
"And when we have interest rates rising and that will affect household budgets, without a doubt, the Prime Minister can't just walk away and say this isn't my fault. He's been in charge of this economy for nine years."
Sign up for our newsletter to stay up to date.