As expected the Reserve Bank has boosted its key cash rate to 7%, the highest level since July, 1996.
The decision for a rise of 0.25%, came after the board met in Sydney today.
The boost was expected by the market with all 27 economists surveyed by Bloomberg News tipping a rise.
The bank also boosted rates in August and November, but as retail sales for December, also out today, showed, that had no real impact, although building approvals fell sharply in the same month.
The Aussie dollar edged higher past 90.70 after the announcement and the ASX/200 fell a bit more, from around a loss of 40 points, to a loss of just over 60 points by the close.
The bank said "A significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time…though the bank expects it to moderate somewhat next year. The world economy is slowing.''
Australia was the first major economy to see a rate rise since the US Federal Reserve cut the Federal Funds rate by a total of 1.25% last month.
The Bank of England is expected to cut its key rate from 5.50% Thursday night, our time, but the European Central Bank will not move from its key level of 4%.
The gap between the Australian and US Central bank benchmarks is now 4 percentage points, the widest in more than three years.
Inflation in Australia rose past the RBA's 2% to 3% target for a second straight quarter in December, forcing the bank to move.
Not even the global instability last month on financial markets was enough to keep the bank's hands of the rate lever.
The bank left a big hint that rates could rise again this year.
"The Board will continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2-3 per cent target."
That's as clearer a threat to lift rates again as ever written at the bank.
Before the decision, the National Australia Bank said there was a 40% chance of a second rate rise this year. With this statement, the odds have firmed.
The banks lifted mortgage rates last month by between 0.12% and 0.20%.
They now have an interesting dilemma: do they follow the RBA up 0.25% or do they move rates by less to try and maintain a competitive position?
