The markets had priced a 25 basis point rise at short odds on Melbourne Cup day. Photo / Getty Images

The markets had priced a 25 basis point rise at short odds on Melbourne Cup day. Photo / Getty Images

The Reserve Bank of Australia raised interest rates as expected yesterday, but the bank's fight with inflation in the future will see further tightening of monetary policy, economists say.

The bank lifted the overnight cash rate by 25 basis points to 3.50 per cent.

Financial markets had priced a 25 basis point rise at short odds on Melbourne Cup day.

The rise made a quadrella of November rate movements by the central bank after 25 basis point increases in 2006 and 2007 followed by a 75 basis point cut last year.

RBA governor Glenn Stevens said the era of low interest rates had passed as the local economy continued to improve.

"With the risk of serious economic contraction in Australia now having passed, the board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker," Stevens said.

"The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."

RBC Capital Markets senior economist Su-Lin Ong said the board noted that a stronger Australian dollar could help in its fight with inflation.

"What's new in the statement in this discussion about the exchange rate is that it may constrain output and dampen price pressures," Ong said.

"It is a roundabout way that the RBA is saying that the currency is doing a bit of the work for them.

"I don't think it will do enough of their work and they will continue to lift rates."

Ong forecast the central bank would lift by 25 basis points to 3.75 per cent at its next board meeting on December 1.

"As they say, despite the exchange rate, growth will be near-trend in the year ahead and inflation will be near target," she said.

"That does not give them much wriggle room."

Borrowers with an average standard variable mortgage of A$300,000 ($374,000) will pay an extra A$48 a month if the commercial banks pass on the rate rise.

National Australia Bank economist David de Garis seized on Mr Steven's comments that the board felt it prudent to "lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker".