In a unanimous decision, the central bank's board lifted the cash rate by 25 basis points to 4.6 per cent as it wrapped up its two-day meeting on Tuesday.
Expectations for a hike had firmed in the weeks leading up to the decision, with hotter-than-expected inflation, rising oil prices and hawkish commentary from the RBA's top brass.
As the central bank's board noted in a hawkish accompanying statement, the upside risks highlighted at its last meeting were materialising.
"The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing," the statement said.
"But inflation is still too high and the board judged that, in light of recent developments, a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period."
Leading up to the decision, markets were fully priced in for another rate rise by February.
The pain for borrowers might not stop there, with markets placing an each-way bet for a third rate hike in 2027.
With the cash rate at 4.6 per cent, the average owner-occupier variable mortgage rate will rise to 6.49 per cent, according to financial comparison site Canstar.
Another two rate rises would mean monthly repayments on the average new owner-occupier home loan of $731,000 would be more than $650 higher than at the start of 2026.
Analysts will closely watch RBA governor Michele Bullock's post-meeting press conference for signs of where the bank might move next.
KPMG chief economist Brendan Rynne said the RBA had no choice but to raise the cash rate.
Higher bond yields were likely to exacerbate the pain felt by borrowers, as the global demand for savings fuelled by debt-laden governments and capital-hungry artificial intelligence hyper-scalers heats up, Dr Rynne said.
He predicted another rate rise in November but said the chance of a third increase in the cash rate was less than 50 per cent.
"Slowing demand and weaker economic conditions as a consequence from the lagged effects of the earlier cash rate increases this year might be enough to have the cash rate peak at 4.85 per cent," Dr Rynne said.
"But the swing factor as to whether this will happen or not is whether government spending remains 'tone deaf' to the recognition that its spending is not helping contain inflation in Australia."
There were signs the jobs market was already softening in August, when the unemployment rate rose to 4.6 per cent.
HSBC chief economist Paul Bloxham sees falling house prices, slower consumer spending and weaker construction, exacerbated by higher interest rates, contributing to a rising risk Australia's economy will tip into a recession in coming quarters.
If the economy deteriorates further, the RBA's resolve on getting inflation back to target might be tested.
Earlier on Tuesday, the Australian Bureau of Statistics revealed household spending growth was flat in August.
But consumers were still on a strong footing.
On an annual basis, household spending was up 6.8 per cent, which indicated that the economy was still exceeding its supply capacity and further interest rates were needed, EY Oceania chief economist Cherelle Murphy said.
Treasurer Jim Chalmers pinned the blame for the rate rise and higher interest rates on the Middle East conflict.
"Australian workers didn't choose this war, but they are paying a hefty price for it," he said.
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