Treasurer Jim Chalmers is seeking to use a review of the RBA to build back consumer confidence after interest rate hikes years earlier than predicted.
Dr Chalmers on Wednesday announced a review of the Reserve Bank's monetary policy and make-up of its board for the first in more than three decades.
"We want to build confidence in the Reserve Bank, and you build confidence in an institution by being prepared to refine it and reform it," he told reporters in Canberra.
"Interest rate rises hurt, we understand that.
"We want to make sure that when difficult decisions are taken by the independent Reserve Bank they're based on the best possible processes and the best possible arrangements."
RBA governor Philip Lowe told a business forum on Wednesday he expected interest rates to increase to 2.5 per cent or more.
"At some point, I imagine rates will get to at least that level," he said.
"How quickly we need to get there and, indeed, whether we need to get there will be determined by the inflation outlook."
Prime Minister Anthony Albanese acknowledged Australians were facing rate hikes as inflation is predicted to hit seven per cent and economic pressures compound.
"It's going to be tough. We have real economic headwinds," he told 3AW.
"I recognise I'm in a privileged position but we do have to recognise ... and never forget that people out there are really doing it tough at the moment."
But Mr Albanese says four rate hikes by the end of the year was " the more pessimistic end of the forecast".
"The Reserve Bank will make its decisions based upon their assessment of where the economy is at but they need to be careful they don't overreach as well," he said.
"Of course, the Reserve Bank declared a while ago, that conceded the error, that interest rates would would stay the extraordinarily low levels ... up to 2024 and that hasn't been the case.
"They need to make sure that they get the assessment right but there are some circumstances that could not have been foreseen."
While some people have been able to build a buffer on their mortgage, others will be put in a concerning situation as inflationary pressures and price hikes for every day goods continue to bite, Dr Chalmers says.
"We certainly expect the real wage situation to be better next year than this year," he said.
"But every credible forecaster or economic commentator expects things to be difficult in the near term."
Professor Carolyn Wilkins, Professor Renee Fry-McKibbin and Dr Gordon de Brouwer have been appointed to examine monetary policy arrangements, including whether the bank's current two to three per cent inflation-targeting framework is appropriate.
The tenure of board member and business leader Mark Barnaba has also been extended by a year, putting it past the March 2023 reporting date of the review.
Mr Barnaba's five-year term was due to end on August 30.
But Dr Chalmers also flagged possible changes on the RBA's board.
"One of the things that I do want the review to look at is the breadth and depth of the expertise and experience that's on the board," he earlier told the ABC.
