The Reserve Bank of Australia (RBA) has lifted the cash rate by another 0.5 percentage points.
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That means the rate will be 1.35 percent, up from 0.85 percent last month.
It is the second consecutive month of rate rises of that magnitude, marking one of the sharpest rate increases since the early 1990s.
RBA governor Philip Lowe said the central bank will continue to lift rates in coming months to withdraw stimulus from the economy.
"Today's increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic," Dr Lowe said on Tuesday.
"The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead."
More rate rises coming
Dr Lowe said the inflation outlook was complicated, globally and in Australia, with supply-chain disruptions, the war in Ukraine, severe local flooding and tight labour markets all contributing to capacity constraints.
He said the RBA would be paying close attention to the global outlook, and noted real household incomes were under pressure in many economies and financial conditions were tightening as central banks increased interest rates.
The RBA still officially expects Australia's inflation to peak at 7 percent later this year, up from its current 5.1 percent.
However, some economists are now questioning that forecast, given today's big rate hike.
"We have pencilled in another 0.5 percentage point rate hike in August after the release of another set of strong second quarter inflation data," Marcel Thieliant from Capital Economics said.
"And we now expect inflation to peak at 8 percent and expect the cash rate to rise to 3.5 percent.
"But we doubt that monetary policy will remain this tight for long. After all, we now expect house prices to plunge by 15 percent from their peak in April which would mark the deepest downturn in Australia's modern history."
- ABC