The central bank on Tuesday decided on the biggest cash rate hike in more than 20 years, a move that helped prompt a major business group to warn the economy could be entering a “death spiral” of rising wages growth, inflation and interest rates.

The central bank jacked up the cash rate by 50 basis points to 0.85 per cent, which was more than most economists had expected. The banks insisted inflation needed to be brought under control.

The CBA’s forecast of a fall in rates next year came as Westpac lifted its variable interest rate by 0.5 per cent and tipped a second hike of a similar magnitude next month.

Housing industry commentators have also said the sector could cope with interest rates in the 6 per cent mark, but beyond that forced sales were likely and prices would fall markedly.

And Australian Industry Group chief executive Innes Willox feared the worst.

“We are now at risk of a wages and inflation and interest rates death spiral,” he told Sky News, noting the upcoming minimum wage decision by the Fair Work Commission.

“We are unfortunately in a period where we are going to see increasing interest rates if we continue to see calls for wage increases that are not sustainable.”

The CBA has said it would also downgrade its GDP forecasts for this year and next year and lift its forecast for unemployment.

Westpac senior economist Bill Evans said the Reserve Bank was now much more aggressive and willing to show an inflation-fighting commitment.

But the issue still remains that much of the inflation is coming from products and services that will remain unaffected by interest rate movements, such as petrol. However, economists thought the RBA was now looking through that and seeing stronger domestic pressures.

Evans said the RBA statement clearly signaled that the bank recognised it had a significant challenge to contain inflation.

SQM Research managing director Louis Christopher said he did not expect an immediate rise in forced sales of houses because loans were now tested to see if borrowers could deal with a rate hike.

He said should mean that property owners could cope with interest rates of 6 per cent.

“The picture changes if lending rates rise to 7 per cent, because very few borrowers have been tested on a theoretical lending rate of 7 per cent,” he said.

“If we go over that point, forced selling activity will increase markedly and that could push prices far lower.

“But I am not so convinced yet the RBA will be that aggressive. They know full-well a housing market crash will smash the economy into recession and with that their reputation being taken into the abyss.”

ANZ also tipped another 0.50 per cent hike in the cash rate, but said it was more likely in August rather than July as Westpac forecasted.

“For July we’ve pencilled in a 25 basis point moves at this stage with 50 basis points clearly being a live option,” ANZ said.

The Commonwealth Bank said it expected the RBA to “front load” interest rates and now expected a 0.50 per cent hike in July followed by 0.25 per cent in August, September and November by which time the cash rate would be 2.1 per cent, which it said was “contractionary”.

The CBA’s Gareth Aird said financial conditions would continue to tighten over 2023 with no change in the cash rate because there was a large number of people coming off fixed rates to variable.

“With the RBA now expected to take the cash rate to a contractionary setting we have pencilled in rate cuts for the second half of 2023,” Aird said.

He said the RBA has shifted from being reactionary to being more forward looking.

Finance Minister Katy Gallagher said the government’s October budget would have a “cost of living lens” to help households manage rising interest rates and inflationary pressures.

“We understand that households … are under enormous pressure,” she told the ABC on Wednesday.

“It’s a real set of challenging circumstances facing the economy.”

Shadow treasurer Angus Taylor warned unnecessary government spending would only fuel higher inflation and higher interest rates.

But one of his own coalition backbenchers, Queensland senator Matt Canavan, said there was no doubt mistakes were made by the previous government in the past year.

“There’s been mistakes made by the government not restraining spending enough,” he told the Nine Network.

Reserve Bank Governor Philip Lowe warned inflation was likely to be higher than the central bank had expected just a month ago, and the size and timing of further rate increases would be driven by incoming economic data.

Inflation spiked to 5.1 per cent in the March quarter.

The RBA expects inflation to hit six per cent by the end of the year, which would be well above its two to three per cent inflation target band.

“It’s headed comfortably above six per cent,” Deloitte Access Economics economist Chris Richardson said.

“Partly given what is happening around gas … but also petrol prices, which have risen again.”

-with AAP