The Reserve Bank of Australia said inflation pressures have increased against the background of strong international conditions.
"Given these circumstances, the board judged that an increase in the cash rate was warranted in order to contain inflation in the medium term," the RBA said.
Australian banks are now reviewing their lending and deposit interest rates with the hike coming just three months after the central bank raised interest rates by 25 basis points to 5.75 per cent.
The mover will add about A$35 a month to the average home loan.
Most economists expected the RBA would increase rate, following yesterday's monthly board meeting.
ANZ said it was likely to lift its rates but would not specify when. "It's inevitable that there will be a flow on to home lending rates but it will take us a couple of days to work out what it means for all our lending and deposit rates," an ANZ spokeswoman said.
Macquarie Bank economist Daniel McCormack said the RBA decision had come as no surprise.
The RBA's decision was accompanied by a statement detailing its reasons for the move.
"The statement does acknowledge the moderation in growth in the US, while also acknowledging underlying inflation pressures in Australia have picked up, and overall the global economy remains quite healthy,' Mr McCormack said.
"Going forward, it's our assessment that the RBA will certainly sit and wait for several months, so there will be no change to interest rates in the near-term."
He said the RBA would want to see the effect of this year's two increases.