Treasurer's inflation warning as Reserve Bank again hikes rates in battle to curb it

The official cash rate now stands at 1.35 per cent as the Reserve Bank continues its fight against inflation.

The Reserve Bank of Australia has lifted the official cash rate for the third straight month in a row. Source: AAP / Bianca De Marchi

Key Points

• The Reserve Bank has lifted the cash rate by 50 basis points to 1.35 per cent.
• It is the third consecutive increase of the cash rate after the RBA lifted it by 50 basis points in June.

Federal Treasurer Jim Chalmers has warned inflation will likely get worse before it gets better as Australia's central bank lifted interest rates for a third straight month in a bid to bring it under control.

The Reserve Bank of Australia (RBA) on Tuesday lifted the cash rate by 50 basis points to 1.35 per cent following its monthly board meeting.

It's the third consecutive cash rate increase after the RBA lifted it by 50 basis points in June - the highest rise since February 2002.

It followed the cash rate rising in May from 0.1 per cent to 0.35 per cent.

The RBA board is seeking to use rate rises to push inflation down from its 21-year high of 5.1 per cent back into its two to three per cent target band.

The central bank's governor Philip Lowe cited high global inflation for the decision to raise the cash rate but said Australia's economy "remains resilient" in the face of international and domestic economic pressures.

Mr Chalmers warned that Australians should expect inflation to rise this year but there will be a reprieve.

"Inflation will get worse before it gets better, but it will get better," he said on Tuesday.

Mr Lowe said the decision is a further step in the withdrawal of monetary support provided during the COVID-19 pandemic.

"Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity," Dr Lowe said in a statement on Tuesday.

"Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices."

The official cash rate has risen to 1.35 per cent in what is a steady hike driven by global and domestic pressures that has led to high inflation levels. Source: SBS News

He said inflation is expected to peak at the end of this year but is expected to moderate to two to three per cent by 2023.

Banks are expected to lift home loan interest rates in line with Tuesday's cash rate increase.

Mr Chalmers said the RBA's announcement is "really challenging news" for millions of Australians, particularly those who "are already doing it tough".

"Mortgage repayments will now eat up an even big part of household budgets which are already stretched because of the skyrocketing costs of essentials," he said.

"Just because this was expected today, doesn't mean it will be any easier for people to cop.

"We do know, we do understand, we do appreciate that the skyrocketing costs of living ... is putting extreme pressure on household budgets and this interest rate rise today will add to the pain that people are feeling."

- With AAP.