SYDNEY, June 6 Reuters Australia39;s central bank on Tuesday raised interest rates by a quarterpoint to an 11year high, and warned that further tightening may be required to ensure that inflation returns to target.

The hawkish message sent the local dollar surging and bond yields spiking, as markets quickly moved to price in an above even chance of a further rate increase next month.

Wrapping up its June policy meeting, the Reserve Bank of Australia RBA hiked the cash rate to 4.1, saying inflation currently around 7 is still too high and that it wanted to prevent high price expectations from becoming entrenched.

Markets had been leaning towards a pause, although they had priced in a sizeable 40 chance that the RBA would hike by 25 basis points. Many economists had seen the June meeting outcome as a tight call.

The Australian dollar jumped 0.8 to 0.6667, the highest in 212 weeks after the policy statement, while threeyear government bond yields advanced 12 basis points to 3.660, the highest since February. Markets have also moved to price in a 60 chance of another hike in July.

This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe, said RBA Governor Philip Lowe in a statement.

The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the…