Australia's central bank hiked its key interest rate to an 18-year high on Tuesday, citing the prolonged war in the Middle East and elevated inflation.

In a statement, the Reserve Bank of Australia (RBA) said it would raise its cash rate by 25 basis points to 4.85%.

"Inflation remains elevated," it said. "This partly reflects higher fuel and other commodity prices affected by the conflict in the Middle East."

"AI-related investment is driving rapid growth in prices for technology-related goods, and inflation in many goods and services remains high."

This marks the fifth increase this year, adding to household cost-of-living pressures by increasing home mortgage payments, a politically potent topic in Australia.

It brings rates to a level not seen since late 2008, at the height of the global financial crisis.

"There continue to be heightened uncertainties about the outlook for domestic economic activity and inflation," the RBA warned.

"Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation. A period of prolonged uncertainty may also cause growth to be lower overseas and in Australia," it added.