The Reserve Bank has raised interest rates on Melbourne Cup Day for the fourth time in five years, taking the official cash rate to 4.75 per cent.

Despite the fact the RBA has moved rates on the first Tuesday every November for the past five years (four times up, one time down), economists were generally surprised by the decision.

Seventeen out of 24 economists surveyed by Bloomberg had expected the official cash rate to stay on hold this month, although many acknowledged it would be a lineball decision.

The Australian dollar surged a cent on the surprise decision, from 98.9 US cents to a whisker under parity at 99.93 US cents at 3:14pm (AEDT).

The RBA increased rates by 25 basis points, despite last week's consumer price figures for the September quarter from the Bureau of Statistics showing both headline and underlying inflation well within the bank's 2-3 per cent target.

House price indices from the ABS and RP Data both also showed home values remaining largely static over the three months to September.

The bank's governor Glenn Stevens justified the first official rate move in six months by looking further ahead at the inflationary pressures building because of the mining boom.

"The economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity," he said.

"Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains.

"At today's meeting, the board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent."

The reference to an "early, modest tightening" is the one bit of good news for those paying off mortgages - it clearly implies the RBA decided to move now, not in December, making another rate rise before February highly unlikely, given the bank's board does not meet in January.

That is a view supported by ANZ's head of Australian economics, Ivan Colhoun.

"For now, a further move in December seems very unlikely and we suspect the market will move to price around 50-75 basis points of tightening next calendar year," he said.

"The good news in today's announcement is that the bank retains a forward looking inflation framework and in moving early, this may reduce the ultimate peak in interest rates and inflation."

However, official interest rates are now at their highest level in two years, and UBS economist George Tharenou says home loan rates will rise above the decade average if the rise is passed on in full.

"The RBA appears to feel more comfortable there has been a passing of sufficient time on hold to see the effects of the previous increase in borrowing rates to average," he wrote in a note.

CBA moves 45bp

Attention now turns to how much the retail banks will raise home loan rates by.

Current standard variable mortgage rates are between 7.24 (NAB) and 7.51 per cent (Westpac), and if they pass on only the 25-basis point official increase it would add around $49 to monthly repayments on a $300,000 mortgage on a 25-year term.

However, major bank chief executives have consistently repeated warnings that higher funding costs mean home loan interest rates will need to rise relative to the official cash rate.

CBA chief executive Ralph Norris was one of the most vocal in saying rates would need to rise to meet funding costs, and the Commonwealth has been the first to move its rates above the official increase.

The Commonwealth Bank announced to the share market just before 4:00pm that its standard variable mortgage rate would be rising 45 basis to 7.81 per cent per annum on Friday November 5.

That will add $88 a month to a $300,000 standard variable mortgage on a 25 year term according to CBA's own mortgage calculator.

However, its deposit rates are only rising in line with the RBA's 25 basis point increase.

In August, CBA reported a 20 per cent rise in its full-year profit to $5.7 billion.

The CBA's group executive for retail banking Ross McEwan says the bank's funding costs have increased 1.35 per cent since the financial crisis, while it had passed on 1.04 per cent to home loan customers before today's increase.

JP Morgan economist Helen Kevans says today's extra increase by CBA, if matched by the other major banks, will all but guarantee the Reserve Bank can stay on hold in December.

"As we have seen, some of the commercial banks have out-hiked the RBA today, so that will do some of the heavy lifting for the RBA," she said.

ANZ and Westpac say their rates remain under review following the decision, while NAB has no official comment at this stage.

Business 'hit hard'

The Australian Chamber of Commerce and Industry (ACCI) says the rate rise will make life difficult for many businesses in the lead up to Christmas.

"It is especially disappointing because it still appeared that the central bank had the flexibility to delay a rate hike until the December meeting," ACCI's director of economics Greg Evans noted in a statement.

"Despite the strength of some sectors such as mining, the great bulk of Australian businesses are only in the early stages of economic recovery and are still waiting for stronger overall trading conditions."

The Australian Industry Group's chief executive Heather Ridout agrees it is the last thing the economic recovery needed.

"Today's rise gives a contractionary tilt to the stance of monetary policy and its impact will be felt disproportionately by industries already under intense pressure from the strong dollar and skill shortages driven by the mining boom," she said in a statement.

"Indeed the rate rise will hit industries growing at a hot pace with a feather, while having a substantive impact on the rest of the economy."

The Housing Industry Association (HIA) also condemned the rate hike, and is concerned about the extra damage to the building industry from any additional increases by the retail banks.

"As it stands, today's 25 basis point hike by the RBA will hit the housing industry hard. There was time to hold off without Australia dying in an inflationary ditch, especially given that utilities played a major role in the latest inflation outcome which in itself provided a proxy tightening for Australian households," the HIA's chief economist Harley Dale wrote in a statement.

"There is compelling evidence that the recovery in residential construction will not be sustained. All leading indicators suggest that new housing activity is fast losing momentum, and now the outlook for investment in renovations is also looking less than impressive."