The Reserve Bank of Australia's decision to increase the official cash rate to 4.6 per cent dominated the national agenda on Tuesday. The fourth rate hike for 2026 pushes borrowing costs to their highest level in 15 years. Furthermore, financial markets and economists widely expect the central bank will strike again when the board meets on Melbourne Cup Day.
A November hike would mark five increases in a single calendar year, a punishing milestone not seen since 2023.
While optimists, including Treasurer Dr Jim Chalmers and the Prime Minister Mr Albanese, were circling the wagons ahead of Tuesday's announcement and suggesting the glass remained at least half-full the reality of relentless cost-of-living pressures tells a much darker story.
Mortgage holders, governments and the business community now face borrowing conditions entirely alien to a new generation of debtors. The financial squeeze is reducing consumer spending, threatening jobs and increasing the likelihood of another "recession we had to have".
The federal government has reacted with something approaching panic. The economy is its glass jaw, and leaders know it. In response, Treasurer Jim Chalmers and Prime Minister Anthony Albanese have unleashed a pre-emptive wave of predicted (and mediocre spin).
Their endless claims that international conflicts, specifically the war in the Middle East, are the primary drivers of domestic inflation, are a calculated exercise in self-serving obfuscation. Blaming external supply shocks is a deflection intended to prevent voters from holding the government responsible for sustained financial hardship.
Reserve Bank governor Michele Bullock demolished this line of argument within minutes of the rate announcement. While stopping short of singling out record government spending Ms Bullock made it clear she considers excessive domestic demand, combined with capacity pressures, is the principal driver of sticky inflation. While global energy prices do play a supplementary role, the core issue is significantly closer to home.
Propped up by government subsidies and handouts and grandiose infrastructure projects, domestic spending and investment have remained stronger than the central bank expected.
There is a profound misalignment between current fiscal and interest rate policy. While the central bank is actively trying to cool the economy by making money considerably more expensive high levels of federal and state government spending continue to inject massive capital into a capacity-constrained system.
This drives up prices. Consequently, the central bank must deliberately squeeze the private sector even harder just to make room for expansive public spending.
The impact extends well beyond the more than 30 per cent households with mortgages (and the 30 per cent of households who face rent increases as a result of the cost of money going up).
Attempts to cool the economy using the blunt instrument of interest rates will result in fewer new jobs, "right sizing" and redundancies, and a much tighter borrowing environment.
The government is hiding behind a foreign war to distance itself from blame for voters who experience sticker shock every time they go to a supermarket or service station.
They hope nobody joins the dots and wakes up to the fact that the RBA wouldn't be acting this aggressively if it didn't believe domestic economic conditions dictate the current reality.
If the government refuses to curb its own spending, ordinary Australians will continue to pick up a tab few can afford to pay.
