Mortgage holders have been slugged with another cash rate rise and the spectre of further financial pain continues to haunt borrowers. 

At the June interest rate meeting, the Reserve Bank opted to lift interest rates by another 25 basis points, taking the cash rate to 4.1 per cent.

The hike marks the 12th increase since May last year when the central bank first started jacking up interest rates.

The latest decision was considered a close call by most observers, with many expecting the RBA to hold fire to allow the tightening so far to wash through. 

But as Governor Philip Lowe explained, inflation is still too high, at seven per cent in the March quarter.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable time frame,” Dr Lowe said.

In a statement, the governor listed simmering inflation risks that motivated the increase – services price inflation that’s “still very high” and proving persistent overseas and “briskly” rising unit labour costs.

In a parliamentary appearance last week, Dr Lowe explained high unit labour costs – the difference between wages growth and productivity growth – was a risk to the RBA’s plan to stamp down inflation.

Some economists have warned the annual increase to award wages may add to these pressures but the governor said the industrial umpire’s decision had not thrown off its outlook for wages – as long as productivity growth picked up.

Treasurer Jim Chalmers said the productivity challenge had been building for some time.

“And you can’t click your fingers and make it turn around,” he told reporters in Canberra.

Dr Chalmers said technology, energy and skills were the three main pieces of the government’s productivity agenda and used an upcoming modernisation of Australia’s payments system as an example of the work under way.

The treasurer also warned that workers’ wages were not responsible for the interest rate rises. 

“Low and middle-income earners are already bearing the brunt of these interest rate rises, they shouldn’t be blamed for them as well,” he said.

Shadow treasurer Angus Taylor said the government was leaving all the heavy lifting up to the central bank. 

“The Reserve Bank has got the foot on the brake at exactly the time when the government has put the foot on the accelerator, with $185 billion of additional spending in the May budget,” he said.

Last week, the RBA governor said the budget would have a broadly neutral influence on inflation.

The June interest rate hike will add an extra $1200 every month to repayments on the average loan, a Finder analysis shows, and the RBA may have more increases in store.

Dr Lowe kept his reference to the possibility of more tightening in his statement.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve,” he said.

KPMG chief economist Brendan Rynne said the RBA was clearly most worried about inflation expectations becoming entrenched so decided to “go hard and go early”.

“(The RBA) fears that if it waited a couple of months to act – as recent economic data gave it reason to – it could miss the boat and then be forced to raise rates even higher,” Dr Rynne said.

He said there was a strong case for the RBA to wait a month or two to see if inflationary pressures were coming off at a reasonable rate.

By Poppy Johnston in Canberra

Cash rate rises to highest point in more than 11 years

The Reserve Bank board has decided at its June meeting to raise the cash rate by 25 basis points to 4.1 per cent, the highest point since April 2012.

* The RBA says wages growth has picked up in response to the tight labour market and high inflation, with public sector wages set to rise and the annual increase in award wages higher than it was last year

* But at the aggregate level, wages growth is still consistent with the inflation target, provided productivity growth picks up

* The path to a “soft landing” in getting inflation back to two-to-three per cent “remains a narrow one”

* The consumption outlook is “a significant source of uncertainty”, as is the state of the global economy

* The RBA says it needs to take action because high inflation “erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality”

* “If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment”

* While goods price inflation is slowing, services price inflation is still very high

By Paul Osborne in Canberra

RESPONSES TO LATEST INTEREST RATE RISE

* ACOSS deputy chief executive Edwina MacDonald: “Instead of relying on the blunt tool of interest rate hikes, the government should be tackling inflation directly by better regulating the rental market and taking further action to reduce energy and healthcare costs. We also urge the government to take further urgent action to assist those on the lowest incomes.”

* Greens treasury spokesman Nick McKim: “The case is now overwhelming for Labor to step in and override the RBA. The RBA is engaging in a war on young people with Labor’s support.”

* ACTU secretary Sally McManus: “The Reserve Bank seems hell-bent on crushing consumers and continues to punish those who did nothing to cause this cost-of-living crisis. This is the wrong decision. An action which is designed to put more pressure on those who cannot afford it and to push up unemployment.”

* Australian Chamber of Commerce and Industry chief executive Andrew McKellar: “If last week’s wage increase was brought to you by the ACTU, so too is today’s rate rise. This failure to exercise responsibility risks consigning Australia to more economic pain – higher prices, mounting interest rates and fewer jobs.”

* Housing Industry Association chief economist Tim Reardon: “Interest rates are a very blunt and ineffective tool in managing inflation and the wider economy. Fiscal policy is a far more effective and precise tool. In addition to the increase in rates, home building is also set to decline as regulatory costs continue to add to the cost of new home construction.”

* The Parenthood chief executive Georgie Dent: “The RBA’s decision will increase financial difficulties for many families across Australia who are already struggling with the surging costs of living. Without bold and urgent support from the government, these families will often be forced to make incredibly unfair choices.”

* CPA Australia spokesman Gavan Ord: “Today’s interest rate increase will put more pressure on businesses. It is getting increasingly difficult to predict where interest rates are heading and to plan for the future. Businesses will have to pass costs on to consumers.”

By Tess Ikonomou in Canberra