The Reserve Bank of Australia has raised the official cash rate from 4% to 4.25%.
The bank said on Tuesday that growth and inflation are around trend and it is appropriate for interest rates to be closer to average.
It is the fifth increase since October last year and takes rates to their highest in 14 months.
The decision will move most major banks' standard variable mortgage rates above 7%, provided they pass on the full increase.
A senior economist at Icap, Adam Carr, says homeowners should expect interest rates to be up to 1% higher by the end of this year.
