The Reserve Bank’s decision to raise interest rates on Tuesday came as little surprise to many in financial markets. But a split decision by the central bank’s monetary policy board – with five in favour of hiking and four wanting to stay on hold – shows very clearly why this outcome was never a done deal.
Many rate hawks were focused on a recent podcast with the RBA’s deputy governor, Andrew Hauser, where he said that “we have a problem with inflation. It’s too high.” But he also said in the same podcast that the “path of interest rates is [to deal with inflation] … is less certain”, especially given the global backdrop. That comment seems to have been largely ignored.
A certain amount of the recent rate spike hysteria has been driven by the strong rise in petrol prices resulting from conflict in the Middle East (as well as some apparent price-gouging by opportunistic petrol companies). Yet the RBA governor, Michele Bullock, in her post-decision press conference on Tuesday, said that higher petrol prices were “not the reason for today’s decision”.
So, what did prompt the RBA board – or at least half of them – to lift rates, just six weeks after an increase following the February monetary board meeting and amid heightened global economic uncertainty? And what does it mean for rates in the coming months?
The RBA has been consistent in its mantra of recent months, and as set out in the February statement, that at least part of the reason for the recent rise in inflation is that “demand exceeds the economy’s supply capacity”, or, more simply, its ability to supply goods and services has not been able to keep pace with demand.
Because an economy’s supply capacity cannot be expanded quickly – investment decisions take time, as does upskilling the workforce, especially when unemployment is low – then the fastest way to fix an imbalance is to cut demand (consumer and business spending). The RBA has a single tool – interest rates – to do this.
But do consumers, or businesses, really need to have their spending reined in? It’s important to remember that monetary policy acts with long delays, so it’s not so much where we are now, but where we expect to be a year from now, that matters for policy settings.
On businesses, we need to see higher investment, not lower, if we are to lift the productive capacity of our economy and allow it to grow faster than the 2% a year that the RBA is telling us is the current speed limit.
On consumers, it’s not at all clear to me that Tuesday’s decision was the best one. There are already numerous factors weighing on household budgets. The governor herself said “I do understand it’s going to be tough for some people”.
The RBA has noted that, while consumer demand was stronger than expected in the second half of 2025, at least some of that strength was due to bringing forward of spending to take advantage of Black Friday and Cyber Monday sales. December and January data have seen consumer confidence plummet and spending has been more subdued.
The combined February and March rate rises will further dampen sentiment, as will speculation of further increases, along with higher petrol prices and the general uncertainty created by war in the Middle East. It’s well worth reminding ourselves that, between mid-2021 and December 2025, inflation outpaced wages by a cumulative five percentage points, or 22.7% compared to 17.5%. And, on top of this, the RBA expects real wages to fall over the next couple of years. Hardly any wonder then that the collective groan of mortgage holders at Tuesday’s decision could be heard across the nation.
On the plus side for households, but adding to the RBA’s reasons to hike, a reasonable number of borrowers have been making additional mortgage repayments since last year’s cuts, which will dampen the impact of the latest rises for them. A buildup in household savings could also help offset higher rates and prices, and soft growth in real household incomes, but there’s little in the way of news headlines that will make the average consumer feel good about raiding the piggy bank.
A key unknown, aside from the duration of the war and escalated oil prices, is how the federal government will respond when it hands down its budget in May. By restraining spending, the government can help the RBA with the heavy lifting.
If I were on the RBA Board, I would have wanted to wait a couple of months to see just how much consumers can bear. I’d also be weighing up the massive level of uncertainty surrounding geopolitical events, which should give all policy makers pause, with increased risks to growth. We are all very used to living in uncertain times since 2020, so we should be used to making big decisions with a higher appreciation of risks and a higher degree of caution.
My (unsolicited) advice to the Board for its next meeting is to exercise restraint, just as they are asking Australian households to.
Nicki Hutley is a consulting economist
