Speaking in Canberra on Tuesday following the Reserve Bank's decision to lift the cash rate by only 25 basis points to 2.6 per cent, Dr Chalmers aired concern the global economy was facing significant risks, which could have severe domestic ramifications.

The RBA's latest efforts at combatting surging inflation, which is now sitting at 6.1 per cent, defied market expectations which had predicted a 50-basis-point hike.

RBA governor Philip Lowe said the bank lifted rates by 25 basis points as it wanted to see how inflation and economic growth were tracking.

According to RateCity, the increase in the cash rate means a mortgage of $500,000 would incur an extra $687 a month in added interest.

NAB was the first of the major banks to pass on the increase to borrowers, announcing variable home loans would increase by the full 25 basis points from October 14. It was followed by Westpac, which will do the same from October 18.

A number of economists believed the bank would loosen its monetary policy squeeze after October, with expectations the cash rate would settle above 3 per cent by the start of next year.

ANZ economist David Plank said the slower pace of tightening may extend the tightening cycle for longer.

The bank's economists are of the view that the bank will need to get the cash rate above 3 per cent to bring inflation back within target.

"We still expect the RBA to tighten by 25 basis points in November, taking the cash rate target to 2.85 per cent," Mr Plank said.

"But there is a bigger question mark over whether the RBA will go again in December as we previously expected."

AMP Capital's Shane Oliver said aggressive hiking of rates risked throwing the economy into an avoidable recession.

The Australian Stock Exchange rose another 48 points after the RBA's surprise decision.

The benchmark index was up 222 points, or 3.44 per cent, within minutes of the decision, putting it on pace for its best single-day performance since April 2020.

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Dr Lowe said in his monthly statement that the board expected to increase interest rates further.

"It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the board's assessment of the outlook for inflation and the labour market," he said.

Dr Lowe said the decision for a 25-basis-point hike was to allow the bank to assess inflation levels in Australia, despite claiming they are "too high".

"The board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia," he said.

It is the most aggressive series of hikes seen since the 1990s and it has increased costs for borrowers who will now have to cough up more to service their loans.

Meanwhile, Dr Chalmers and Finance Minister Katy Gallagher are poised to hand down their first budget on October 25, with the Treasurer lamenting the need to tighten the fiscal purse strings in a bid to manage the ongoing pressures facing the country.

"The likelihood of recession has tipped over from possible to probable in some of these big economies," Dr Chalmers said.

"I think the weight of opinion around the world is that the global situation has gotten much worse, even in the last few weeks. The storm clouds are gathering in the global economy and that's not irrelevant to us as we finalise the budget."

Both the US Federal Reserve and the European Central Bank have flagged higher levels of inflation are to be anticipated and more persistent. Dr Chalmers said Treasury would give updated forecasts in the budget. But he noted a high degree of uncertainty around the path to normalising inflation, which is set to run at 7.75 per cent by the December quarter, centred primarily around electricity prices.

"I haven't been advised of any material change to the inflation outlook, but those numbers are still to be finalised," he said.

"I think, anecdotally, when you speak to economists around the country, I think the concern that they have about our inflation outlook is around electricity."

High levels of inflation are being influenced by global supply shortages due to COVID-19 and commodity shocks sparked by the conflict in Ukraine.

Shadow treasurer Angus Taylor said the rise was lower than expected but still harmful to households.

"We want to see a budget that does not add fuel to the fire of the pressures that Australians are feeling" Mr Taylor said.