SYDNEY, July 5 Reuters Australia39;s central bank on Tuesday raised interest rates for a third straight month and flagged more ahead as it struggles to contain surging inflation even at the risk of triggering an economic downturn.

Wrapping up its July policy meeting, the Reserve Bank of Australia RBA lifted its cash rate by 50 basis points to 1.35, marking 125 basis points of hikes since May and the fastest series of moves since 1994.

The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead, said RBA Governor Philip Lowe in a statement.

The hike was widely expected in markets and the local dollar eased slightly in reaction to 0.6863 while futures narrowed the odds on another halfpoint hike in August.

Lowe was confident the economy could withstand the jolt with unemployment at fivedecade lows of 3.9 and job vacancies at alltime highs. Household demand has also held up well, thanks in part to A260 billion 178.59 billion in extra savings accumulated during the pandemic lockdowns.

Still, higher borrowing costs are bound to be a drag on spending power given households owe A2 trillion in mortgage debt and home values have started slipping after a bumper 2021.

The hikes delivered so far will add around A400 a month in repayments to the average A620,000 mortgage, and that is on top of higher costs for energy, petrol, health and food.

Rates were expected to rise, and they39;re expected to bite, was the…