The S&P/ASX200 fell 16.6 points on Tuesday, down 0.19 per cent, to 8,680.5, as the broader All Ordinaries lost 20.5 points, or 0.23 per cent, to 8,903.3.
Stubborn inflation, further pressured by the Middle East energy crisis, prompted the RBA board to hike the cash rate to 4.35 per cent, unwinding all of 2025's cuts in just three meetings and weighing on equities.
"The Reserve Bank of Australia delivered a hawkish signal with an 8-1 vote for a third consecutive hike, reinforcing that policy remains firmly in tightening mode with no pause in sight," Vanguard senior market analyst Hebe Chen told AAP.
"Higher bond yields, a firmer Australian dollar and increased pricing for further hikes are tightening financial conditions and weighing on equities."
Energy stocks outperformed, up 0.9 per cent, as Brent oil topped $US114 a barrel, helping boost Woodside shares 1.9 per cent to $32.71, as refinery operators Ampol and Viva also improved.
Coal miners were mixed, while uranium stocks sold off.
Seven of 11 local sectors actually ended the session higher, but modest slumps in the heavyweight financials and basic materials sectors dragged on the bourse.
Three of the big four banks traded lower, led by a 2.3 per cent drop in Westpac to $37.63, while CommBank broke the mould with a 0.4 per cent advance to $172.86.
Westpac's slip came as it joined ANZ and NAB in delivering modest interim earnings growth and cautious strategic updates in uncertain times for the global economy, said Jackie Neumann, Sharesies' head of capital markets.
"Citing sticky inflation, energy supply chain disruptions, and geopolitical instability in the Middle East, banks such as NAB and Westpac have actively bolstered their defences," Ms Neumann said.
"Both institutions have fortified their balance sheets by topping up collective provisions and applying specific overlays for energy-intensive sectors, preparing for a potentially bumpier economic cycle."
Materials stocks dipped 0.6 per cent, as BHP, Lynas and Northern Star came under pressure.
Gold miners were mixed, with the precious metal trading at $US4,544 ($A6,358) an ounce.
Consumer discretionaries fell 0.4 per cent, tracking with retreats for Wesfarmers JB Hi-Fi and Eagers Automotive, with the confirmation of the RBA rate hike weighing on already waning consumer confidence.
The ASX-listed tech sector advanced despite shaky investor confidence, led by a more than five per cent charge in WiseTech as it outlined its growth strategy at the Macquarie Australia Conference.
In company news, Flight Centre shares soared 4.2 per cent higher to $10.59, after it maintained its 2026 earnings guidance despite headwinds from the Persian Gulf energy crisis.
Magellan Financial tumbled almost seven per cent after handballing the responsibility for its $5.3 billion Global Equities funds to strategic partner Vinva Investment Management.
The Australian dollar is buying 71.44 US cents, falling from 71.97 US cents on Monday at 5pm. The Aussie slipped on the escalating conflict between the US and Iran, which weighed on risk sentiment.
ON THE ASX:
* The S&P/ASX200 fell 16.6 points, or 0.19 per cent, to 8,680.5
* The broader All Ordinaries fell 20.5 points, or 0.23 per cent, to 8,903.3
One Australian dollar trades for:
* 71.44 US cents, from 71.97 US cents at 5pm AEST on Monday
* 112.32 Japanese yen, from 112.93 Japanese yen
* 61.13 euro cents, from 61.37 euro cents
* 52.78 British pence, from 53.00 British pence
* 121.61 NZ cents, from 121.84 NZ cents
