SYDNEY Australia's central bank decided to hike at its May meeting due to inflation risks from weak productivity growth, persistently high services inflation and faster-than-forecast rental increases, saying more rate rises may be required.

Minutes of the Reserve Bank of Australia's May 2 policy meeting released on Tuesday said board members also considered a pause, but that the inflation risks warranted a 25 basis point increase, after holding rates steady in April.

"In weighing up the two options, members recognised that the arguments were finely balanced but judged it appropriate to increase interest rates at his meeting," the minutes said.

"Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve."

The primary driver for the RBA's decision was its inflation outlook. Inflation is not expected to decline to the top of the Bank's 2-3% target range until mid-2025, leaving little room for upside risks, the May minutes said.

Members noted strong employment data and high services price inflation in March, while the depreciation of the Australian dollar and an increase in house prices, may have been in part caused by the decision to pause rates in April.

Governor Philip Lowe has warned that the central bank cannot take too long to being inflation to heel. Rates have already risen by a whopping 375 basis points since last May to an 11-year high of 3.85%.

Markets have priced an 85% chance of a pause in June, while seeing a higher risk of a hike in August or September. They also pushed back the first rate cut to March next year.

(Reporting by Alasdair Pal and Stella Qiu)