The Reserve Bank of Australia's tightening cycle may not be over after the central bank lifted the cash rate to 4.1% in June.

In what is viewed as a close call, the RBA board has increased the cash rate by another 25 basis points following its monthly meeting on Tuesday.

Announcing the 12th hike since May 2022, RBA governor Philip Lowe signalled further rate rises may be required to get inflation back down.

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve," Lowe says.

"The board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market."

The cash rate is now at its highest level since April 2012, after 400 basis points in hikes in 13 months—and a growing number of economists expect further rises will be necessary to rein in inflation.

The RBA decision comes after an acceleration in inflation and a historic wage rise for Australia's low-paid workers, but ahead of data on Wednesday that is expected to show a slowdown in economic growth.

What concerns the RBA


Lowe says inflation has passed its peak in Australia but at 7% is still too high and it will be some time yet before it is back in the RBA's 2-3% target range.

He says the board has responded to recent data indicating the upside risks to the inflation outlook have increased.

"While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas," Lowe says.

"Unit labour costs are also rising briskly, with productivity growth remaining subdued."

The RBA's central forecast is that the headline inflation rate will return to 3%—the top end of its target band—in mid-2025.

According to the latest Australian Bureau of Statistics monthly consumer price indicator, inflation has risen by a stronger-than-expected 6.8% over the year to April.

Lowe says wages growth has picked up in response to the tight labour market and high inflation, and further increases are expected after the Fair Work Commission's annual wage decision.

"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," he says.

"At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up."

The FWC on Friday announced a 5.75% lift in award rates of pay, while a technical change means the base rate of the minimum wage increases by 8.6% from July.

Lowe will make further comments in a speech in Sydney on Wednesday, before the ABS announces the March quarter national accounts data.

The market is forecasting 0.3% growth in quarterly gross domestic product (GDP).

Investing in times of high inflation and rates


Morningstar's director of product management Mark LaMonica says the inflation, interest rate and economic environment remain highly uncertain.

While noting forecasts for the RBA to raise rates further, LaMonica says a big driver of what happens in share markets will be whether expectations for rate cuts in the US and Australia by the end of the year are met or not.

"The market is still expecting interest rate decreases in late 2023 while inflation appears to be getting more embedded and many are calling for a recession in the US and possibly Australia," he says.

LaMonica has been examining how to approach investing in a world awash with debt following the low interest rate era, with S&P Global estimating the global debt problem at a record $US300 trillion ($A453 trillion) in 2022—and rising interest rates have added $US3 trillion ($A4.5 trillion) in annual interest expenses.

"The implications of a world awash in debt and a record rise in interest rates are just being felt in the economy and markets," he notes.

Increased debt servicing costs may mean less profits for individual companies and less money to invest in the business or pay in dividends, he says, while governments and consumers will have less money to pump into the economy.

LaMonica says investors should keep the focus on the long term and consider a long-term reorientation of their investment approach.

He suggests owning companies that have the flexibility to respond to changing economic conditions and building resilience into investment portfolios through diversification.

"Focusing on quality companies is an investment approach that never goes out of fashion."

In a new Investing Compass podcast, LaMonica and Morningstar senior investment specialist Shani Jayamanne have looked at the "double whammy" of persistent high inflation on retirees.

"High inflation makes it hard to support higher withdrawal rates while crushing the very returns that would allow you to maintain that withdrawal rate to support a higher standard of living," Jayamanne says.

One of LaMonica's suggestions is that retirees look for inflation hedges in their portfolios, such as commodities, companies with moats or sustainable competitive advantages and those that built in inflation hedges in contracts with customers.

How much higher rates may go


Just as they have been split over the prospects of a June rate rise, economists are divided on how much higher the cash rate will go.

Several economists have lifted their forecasts for the terminal cash rate over the past week after the rebound in inflation and minimum wage decision, with some experts including Deutsche Bank and Jarden now expecting a peak of 4.6%.

Deutsche says multiple rate hikes are likely before the end of the year, pointing to resilience in household spending, a turnaround in the house price cycle, an unemployment rate that could move sideways for at least six more months and the minimum wage decision.

ANZ and UBS economists are among those predicting the cash rate will hit 4.35%, with ANZ's head of Australian economics Adam Boyton saying it no longer sees a 4.1% cash rate as sufficient to bring inflation back to target in a reasonable period of time.

"The inflation 'challenge' in Australia is not the pace of wages growth, but the weakness in productivity growth that has pushed up unit labour costs," Boyton says.

CBA, Westpac and Morgan Stanley economists are among those who had expected the RBA to hold the cash rate steady in June while continuing to emphasise its tightening bias.

Morgan Stanley has raised its terminal rate forecast to 4.35% due to sticky inflation and easing financial conditions but expected the RBA to continue its slower hiking pace, having first paused in April before a surprise hike in May.

Morgan Stanley economists also point to a likely long stay in restrictive territory, tipping the RBA will keep rates on hold at 4.35% for longer and pushing back the timing of rate cuts to August 2024.

CBA's base case is for 3.85% to be the peak in the cash rate, while noting the near-term risk sits with another hike.