The Reserve Bank has lifted its official interest rate to 4.1 per cent, a level not seen since early 2012.
The bank's board decided to lift the cash rate target by 0.25 of a percentage point for the second month in a row, amid concerns inflation is taking too long to come down.
The most recent monthly consumer price index from the Australian Bureau of Statistics showed prices rose 6.8 per cent over the year to April, up from the March reading due to some statistical noise caused by last year's temporary fuel excise cut.
Reserve Bank governor Philip Lowe again sounded a warning about the rising cost of services, such as hospitality, which are labour intensive and vulnerable to rising wages.
"Recent data indicate that the upside risks to the inflation outlook have increased and the board has responded to this," he noted in his post-meeting statement.
"While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued."
Westpac was the first of the major banks to respond, saying it would pass the rate rise on in full to mortgage borrowers, effective June 20, while it is still reviewing its savings rates.
Wage rises in focus as RBA hikes rates
In particular, Mr Lowe drew attention to last week's slightly bigger than expected rise in minimum and award wages, which was the highest in decades.
"Wages growth has picked up in response to the tight labour market and high inflation," he observed.
"Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year.
"At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up."
RBC Capital Markets chief economist Su-Lin Ong told ABC TV's The Business program that the 5.75 per cent increase in award wages would likely add to inflation.
"That is not consistent with the inflation target," she argued.
"While it is very understandable from a fairness, equity perspective that the lowest paid in Australia should receive an increase, there are potentially some consequences of such a large increase for wages and inflation more broadly."
CBA's head of Australian economics Gareth Aird said, in the absence of other strong data pointing to the need for a rate rise, he can only conclude that the RBA moved because of the minimum wage decision.
"The risk of a hard landing for the economy has grown today," he warned.
Federal Treasurer Jim Chalmers said Tuesday's decision will hit many households hard, and it is up to the independent Reserve Bank to explain its reasoning.
"The Reserve Bank's job is to squash inflation without crunching the economy, and they will have lots of opportunities to explain and defend the decision they have taken today," he told reporters.
However, Shadow Treasurer Angus Taylor argued it is the government with explaining to do amid a "cocktail of policies" he accused of worsening inflation.
"Fiscal policy, energy policy, industrial relations policy combining to create an inflationary fire," he said.
"That's where these interest rate increases are coming from."
But Mr Chalmers was quick to counter claims the recent budget or rising wages were forcing the RBA's hand.
"This rate rise today is not because of the budget, and it is not because people on the minimum wage are being paid too much, and we should be really clear about that," he said.
Unlike last month, Tuesday's move was not a complete surprise, with markets pricing in around a 35 per cent chance of a rate rise in June and economist forecasts split.
The increase will add around $76 a month to the repayments on a $500,000 loan, and twice that on a million-dollar 25-year mortgage.
In total, someone with $500,000 owing on their home loan has seen their monthly repayments jump by around $1,134 a month since the RBA started lifting rates from a record low of 0.1 per cent in May last year.
More rate rises 'may be required'
But they should still brace for the risk of at least one more rate rise, with Mr Lowe leaving the door ajar.
"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 cautioned.
Su-Lin Ong is forecasting there will only be one more rate rise, to 4.35 per cent, but added that the risk is for rates to head even higher.
"We do think another rate hike is likely, whether it's July or August will depend on the data run," she said.
"But it's really about ensuring that policy is restrictive enough that it will see a much greater weakening in domestic demand, particularly the consumer, and that will give them greater confidence that inflation will eventually come back into the target range."
Market pricing implies a peak cash rate around 4.3 per cent by October, with a small chance of a rate cut from the before Christmas, according to Bloomberg data.
Mr Lowe again acknowledged that certain sections of the community were bearing the brunt of rising mortgage costs, while others benefited from higher deposit rates.
"The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending," he observed.
"Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances."
BDO EconSearch partner Anders Magnusson has warned that the Reserve Bank risks pushing those households under financial strain too far.
"The RBA risks recession and unnecessary pain by increasing the cash rate before the effect of recent rate rises have played out," he argued.
"Inflation peaked in December and past RBA increases have already locked-in the effects necessary to bring it closer to the target range of 2 to 3 per cent in the medium-term."
'Forced and panicky selling' tipped for real estate market
Ms Ong said the RBA would be somewhat concerned by the recent rebound in housing prices that started in Sydney and has now spread across most of the nation.
"While it may not have been the key driver of today's decision, I think it's one of a number of factors that support policy moving to more restrictive territory," she argued.
"So what we do know in terms of rising house prices is that they're often associated with higher turnover of housing that generally drives higher household consumption — and that is not what the Reserve Bank wants to see."
However, veteran housing market analyst and SQM Research managing director Louis Christopher believes rates have now hit a tipping point that will trigger a double dip housing downturn.
"While our numbers on distressed listings today remain largely benign (except for Tasmania), we can now expect distressed activity to rise based on a new round of forced and panicky selling starting sometime in the second half of this year," he warned in a note.
"This will particularly be the case if unemployment rises towards 5 per cent. Naturally, the higher the unemployment rate, the more forced selling we will see.
"So, in our view, market participants need to be prepared for a new round of housing price falls starting in the second half of 2023.
"The price falls may not immediately occur, but the expectation is the spring selling season will be a tough one for sellers."
RBA governor Philip Lowe is speaking at a Morgan Stanley banking event in Sydney on Wednesday morning, giving him the chance to provide further explanation for the latest rate rise.
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