The Reserve Bank has decided to lift the cash rate by 25 basis points as it nears its highest levels in nearly a decade.
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The central bank announced the 0.25 percentage point lift on Tuesday afternoon. It is the seventh rate hike in a row, bringing the cash rate to 2.85 per cent.
The move comes as the federal government faces political pressure to ease the skyrocketing cost of living on Australian households with the opposition describing homeowners as the Melbourne Cup day's "biggest losers".
Reserve Bank of Australia governor Philip Lowe said inflation in Australia, like in much of the world, is "too high".
Inflation is now expected to peak at 8 per cent later this year - a 0.25 percentage point increase on earlier forecasts.
"Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role," Dr Lowe said.
"Returning inflation to target requires a more sustainable balance between demand and supply."
Inflation rose to 7.3 per cent last week - the highest seen since 1990 - increasing 1.8 per cent during the September quarter.
Dr Lowe said inflation would likely decline next year to around 4.75 per cent with forecasts suggesting it will remain a little over 3 per cent in 2024.
Treasurer Jim Chalmers said on Tuesday inflation is the federal government's number one focus.
"This is precisely why the budget was designed for dealing with these inflationary pressures, which will get a little bit worse before they get better, but they will get better in time," he said.
"That the pressure is coming on Australians from around the world but it's felt around the kitchen table."
But opposition treasury spokesman Angus Taylor said the federal budget offered no financial lifeline to households doing it tough in the meantime.
"Australians have been told their power bills are going up by more than 50 per cent, their mortgage payments will continue to rise, the cost of groceries will remain high, inflation will continue to surge and yet the government still has no plan to tackle this cost of living crisis," Mr Taylor said.
"Australians can't wait another seven months for Labor's second budget to come up with a plan to deal with cost-of-living pressures that have become very real and painful for so many."
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The Albanese government's first budget, handed down last Tuesday, revealed the cost of electricity would increase 56 per cent while retail gas prices would rise by more than 40 per cent.
Its plan is to bring down energy prices through additional regulatory measures with industry price caps and mandatory codes of conduct being considered.
Dr Chalmers defended the budget's lack of household relief, saying the government needed to refrain from further fueling inflation.
"That temptation becomes a lot stronger when you see people hurting ... as a Labor government, as Labor people, we feel that, we care about that, it keeps us awake," he said in a post-budget address to the National Press Club.
"Whether it's food, whether it's electricity, whether it's rent, inflation is public enemy number one, inflation is the dragon we need to slay."
