The Reserve Bank of Australia (RBA) hiked rates by 25 basis points to an 11-year high on Tuesday and cautioned additional tightening to ensure inflation reverts to target.

At its June policy meeting, the central bank raised the cash rate to 4.1%, stating inflation remains too high, with the aim of preventing elevated price forecasts from becoming embedded.

Markets had predicted a pause in the central bank’s tightening cycle yet had priced in a 40% chance the RBA would increase rates by 25 basis points, Reuters reports.

Following the policy statement, the Australian Dollar rose 0.8% to a two-and-a-half-week high of $0.6667.

“Inflation in Australia has passed its peak, but at 7% is still too high, and it will be some time yet before it is back in the target range,” said central bank Governor Philip Lowe in a statement.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” he added.

Lowe also recognised that “high inflation makes life difficult” for everyone and was damaging to the economy. “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,” he stated. 

The Reserve Bank of Australia has hiked rates by 400 basis points since last May and surprised markets last month by increasing rates again after a month’s pause.

Furthermore, this latest rate hike has been criticised by the Australian Chamber of Commerce and Industry (ACCI), blaming the push for a rise in the minimum wage by the Australian Council of Trade Unions (ACTU).

“The result of the ACTU’s irresponsible wages claim could not be clearer – wages growth not supported by productivity gains risks entrenching inflationary expectations and inflationary pressures,” said ACCI chief executive Andrew McKellar.

“The Reserve Bank’s decision to hike rates another 0.25% will come as a blow to millions of households and small businesses across the country.

“After last week’s Fair Work Commission decision, it has become increasingly difficult for the RBA to return inflation to target, with the bank indicating that further monetary tightening is likely,” he added.