SYDNEY, May 2 Reuters Australia39;s central bank on Tuesday stunned markets by raising its cash rate 25 basis points when traders had looked for an extended pause, saying inflation was way too high and warned that even further tightening may be needed to bring it to heel.

The unambiguously hawkish policy stance sent the Australian dollar soaring and bond futures tumbling as markets quickly lifted the peak for interest rates.

Wrapping up its May policy meeting, the Reserve Bank of Australia RBA raised rates to 3.85 and said some further tightening may be required to ensure that inflation returns to target in a reasonable timeframe.

The cash rate now sits at its highest since early 2012, bringing the total RBA hikes in its price battle to a whopping 375 basis points since May last year the fastest tightening campaign in the nation39;s modern history.

Markets, as well as a majority of analysts, had been wagering heavily on a steady outcome given core inflation had eased a little more than expected and the RBA had said at its previous policy meeting that the full pain of the past tightening was yet to be felt in the economy.

The Australian dollar shot up by 1.3 to 0.6715, while threeyear futures dived 15 ticks to 96.770.

Futures slid as the market priced in the new 3.85 rate and implied around a 60 chance rates could reach 4.10 by August.

Inflation in Australia has passed its peak, but at 7 percent is still too high and it will be some time yet before it is back in…