SYDNEY, Oct 4 Reuters Australia39;s central bank on Tuesday surprised markets by lifting interest rates by a smallerthanexpected 25 basis points, saying they had already risen substantially, although it added that further tightening would still be needed.

Wrapping up its October policy meeting, the Reserve Bank of Australia RBA raised its cash rate to a nineyear peak of 2.60, the sixth hike in as many months which included four outsized moves of 50 basis points.

The bank had recently flagged a possible slowdown in the pace of hikes at some point. But markets had wagered it would go by half a point this week in part due to an aggressive Federal Reserve rate hike last month.

The cash rate has been increased substantially in a short period of time, RBA Governor Philip Lowe said in a statement.

Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia, he added. The Board expects to increase interest rates further over the period ahead.

Investors took the local dollar down 0.8 to 0.6465 , toward its recent 212 year trough of 0.6364.

Interest rate futures jumped as the market priced in a likely lower peak for rates, under the 4.0 previously expected, while threeyear bond futures were down a steep 42.5 ticks at 96.750.

It sends quite an important signal about the pace of future hikes … when you drop down a gear now, while most of the globe is still doing much…