Today's 25-basis-point rise pushes the central bank's cash rate to 3.25 per cent and will add $40 to the average monthly payment for a typical $300,000 mortgage if passed on by commercial banks. The extra cost may stretch household budgets at a time when unemployment remains on the way up.

"Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," Glenn Stevens, governor of the RBA said in a statement accompanying the rate increase.

The Australian dollar jumped on the rate news, adding more than half a US cent to 88.2 cents, its highest in almost 14 months.

Today's rate hike - the first shift in either direction since April, when rates were reduced to 3 per cent, and the first increase since March 2008 - is the surest sign yet that the local economy is on the mend.

The RBA has been emboldened by strong retail sales, rising consumer confidence and a rebound on share markets worldwide, which are up 50 per cent in Australia alone since March.

The central bank does not want the economy's overall health to be threatened by underlying inflation or unsustainable borrowing activity, which can be triggered by low rates.

And the bank is worried about the effect of unchecked house prices rises, which analysts say received an unintended boost from the First Home Buyer's Grant.

Those financial incentives for home buyers, put into place a year ago at the height of the economic crisis, were cut from last week and will be cut again at the end of the year.

Despite the positive economic signs, the job market remains weak, with the unemployment rate, currently at 5.8 per cent, expected to have hit 6 per cent in September when new data is revealed on Thursday.