In a split 6-3 decision on Tuesday, the central bank board lifted the cash rate by 25 basis points to 4.85 per cent.
The decision was widely anticipated by economists and bond markets, which had been pricing in the chance of a hike at more than 80 per cent.
The Iran war and the artificial intelligence boom had further worsened price pressures since the RBA raised rates in September.
Overseas factors were driving up inflation, but domestic capacity pressures were also higher than previously thought, RBA governor Michele Bullock said.
While the bank did not anticipate a recession, Ms Bullock acknowledged higher interest rates would make many Australians feel poorer.
The RBA on Tuesday revised up its forecast for unemployment to five per cent by 2028.
Real wages were revised down, going backwards one per cent in 2026.
While the Middle East conflict has exacerbated Australia's inflation dilemma, economists identified high government spending as a contributing factor.
At the same time, low productivity growth was constraining how fast the economy could grow without pushing prices up further, KPMG chief economist Brendan Rynne said.
The RBA would likely pause in December, but it could consider more hikes in the new year if conditions don't improve over Christmas, Dr Rynne said.
The board's split decision was a dovish signal for markets, as was the board's statement, which no longer warned that it would increase the cash rate target further if needed.
But Ms Bullock said she wouldn't rule out further hikes if inflation remained too high.
"It is critical that we stop expectations for high inflation from becoming embedded in price-setting decisions across the economy, or the problem will only get worse," she told reporters following the announcement.
"Some pain now will prevent even worse pain down the track."
Tuesday's rate rise heaps extra pressure on Treasurer Jim Chalmers to find savings in December's mid-year budget update.
Dr Chalmers said budgets weren't the primary driver of prices in the economy, but the government took responsibility for its part in the fight against inflation.
"We've found almost $180 billion in savings since coming to government. There have been savings in all eight of our budget updates so far, and there will be more savings in the mid-year budget update in December," he said.
Business groups called on the government to slash spending and drive growth in productivity.
"It's hard to ask Australians to tighten their belts when the federal government isn't tightening its own," said Business Council of Australia chief executive Bran Black.
Cumulatively, the RBA's five rate rises in 2026 have added more than $450 in monthly interest repayments for the average mortgage holder with a $600,000 loan, financial comparison site Canstar says.
Property prices have already fallen by 6.7 per cent nationwide since the first hike in February, according to data provider Cotality.
Commonwealth Bank updated its forecasts on Tuesday, predicting the downturn to run to 14 per cent from peak to trough, with falls of 18 per cent in Brisbane and Perth.
HSBC Australia chief economist Paul Bloxham said the fall in housing prices and turnover would weigh more heavily on consumption and result in a sharper rise in unemployment than the RBA assumed.
He put the risk of a recession at one in two.
"In our central case, a faster weakening of growth keeps the RBA from hiking further," Mr Bloxham wrote in a client note.
"If growth does not weaken as fast as we expect, there remains a risk the RBA may have to hike further yet."
