Australia’s central bank has triggered a third interest rate hike in as many months, imposing a 50 basis point increase which lifts the official cash rate from 0.85% to 1.35%.

The widely anticipated increase was unveiled on Tuesday afternoon and it compounds price pressures building on Australian households, including petrol prices north of $2 a litre despite a temporary reduction in fuel excise, and the looming negative impact of renewed flooding on fresh food prices.

The governor of the Reserve Bank of Australia, Philip Lowe, signalled more rate rises were likely in the coming months.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he said in a statement.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

The treasurer, Jim Chalmers, was out managing expectations ahead of Tuesday’s announcement, saying households would face difficult conditions for the rest of the year and it was important to be upfront with people about that reality.

Market analysts suggest the cash rate could end up somewhere between 2% and 3% as the RBA attempts to dampen surging inflationary pressure in the economy, and Chalmers warned on Tuesday morning the latest increase “won’t be the last one this year”.

Chalmers acknowledged in a rising interest rate climate “a bigger proportion of household budgets, which are already stretched by the price of petrol and groceries and electricity and other essentials, [would] be eaten up by mortgage repayments”.

“People will find today’s news really difficult, I think,” the treasurer said. “It will be a tough day for a lot of homeowners.”

He said the RBA was increasing the cash rate because “we’ve got high and rising inflation, and that’s why they have deemed these difficult decisions to be necessary”.

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Global supply chain problems and rising energy prices are fuelling the current trend that could see inflation hit 7% by year’s end while the unemployment rate has fallen to record lows.

Lowe said on Tuesday the bank’s expectation was inflation would peak later this year before declining “back towards the 2 to 3% next year.” The RBA governor said higher interest rates would help to establish a more “sustainable balance between the demand for and the supply of goods and services.”

The treasurer drew attention to that element of Lowe’s statement after the RBA unveiled its decision, but he said the next few months of households being squeezed between rising prices and higher borrowing costs would be difficult.

He said the difficult conditions would moderate, but they were currently sufficiently challenging to require institutional interests in the economy – governments, unions, businesses – to work together and find common ground.

Chalmers said he had spoken with the retail banks a number of times since being sworn in to the treasury portfolio post-election, seeking advice about the exposure of households to higher borrowing costs.

He said the banks had told him some customers had used the spending constraints imposed by the pandemic to pay down mortgages, but others were “right on the margins”.

The treasurer said rising rates were particularly painful for Australians in the latter category “but even for people who have a bit of a buffer, every half a per cent that interest rates go up, if you’ve got a $500,000 mortgage, that’s about $137 a month that you need to find in your family budget”.

“It will be a difficult day. I think there will be some difficult news, some tough news, for a lot of Australians.”

The rising interest rate climate has already had a negative impact on house prices. CoreLogic’s home value index has fallen for two consecutive months, with the national fall in home values driven by sharp monthly declines in Sydney (down 1.6%) and Melbourne (down 1.1%).

Chalmers was also clear the latest flood disaster in NSW would require further calls on the budget. As well as coordinating disaster relief and activating defence force personnel, the treasurer was clear the government was considering activating $1,000 immediate cash for people displaced from their homes.