The Reserve Bank of Australia (RBA) on Wednesday raised interest rates from 6.25 percent set in last November to 6.5 percent, the highest level in 10 years.
Economists have expected the interest rate rise as a measure to head of inflation measures on the economy.
The RBA announcement follows a higher-than-expected inflation result last month which showed that consumer prices surged 1.2 percent in the second quarter.
Commonwealth Securities chief economist Craig James told Sky News that "it (the bank) no doubt believes inflation could bubble a little bit higher, and it's acted accordingly to be able to restrain growth."
This comes just months before a federal election is expected to be held.
Telling reporters here, Prime Minister John Howard conceded the interest rate rise will hurt homebuyers, saying "it will have an impact on some household budgets."
But, he added the rate rise would be offset by the government's strong budget surplus and tax cuts.
Meanwhile, Treasurer Peter Costello said the rate rise was due to the economy strengthening.
"The statement released by the bank made it clear that the reason why it raised the official cash rate was that the domestic economic demand has signaled a pick up in the pace of growth," he told reporters.