The Reserve Bank has lifted the cash rate four times this year, taking borrowing costs to a 15-year high. Consumer confidence has tanked. Yet household spending is still about 7% higher than it was twelve months ago, and inflation hit 4% in August, well above the bank’s goal of under 3%.
So are the hikes working? Not in the way the textbook says. Rate rises are meant to bite across the whole economy. This cycle they are landing unevenly, and that is the part worth understanding if you are making a borrowing or investing call right now.
Why inflation is not responding on schedule
Part of the problem is that not all of this inflation is the kind a rate rise can fix. Oil supply problems push up fuel and freight costs regardless of what the cash rate does. Heavy construction demand keeps building costs high. And some firms are simply raising prices because customers are still willing to pay.
That last point matters. Higher rates work by making people hold back. If spending barely flinches, businesses keep their pricing power, and the policy lever loses force.
Who benefits from higher interest rates, and who is shielded
Here is the catch with this cycle: a large slice of households is cushioned, or even better off.
- Outright owners. About a third of households own their homes with no mortgage. They pay nothing extra on a loan and earn more on their savings.
- Offset account holders. Offset accounts hold almost $350bn. Money sitting in an offset cuts interest on the loan without being locked away, so many borrowers feel a smaller squeeze than the headline rate suggests.
- Savers. With deposit rates higher, anyone holding cash is collecting more income. That income supports spending, which works against what the RBA is trying to do.
- Renters. They are shielded from mortgage costs directly, although landlords can pass costs through over time.
The flip side is the group actually absorbing the tightening: borrowers with thin buffers. Only about 2% of borrowers cannot cover essentials, which is a small share, but it is the group that feels every hike in full. Our guide to mortgage stress and arrears covers the warning signs, and our look at who is squeezed in Sydney and Melbourne shows how unevenly the pressure falls by location.
The catch
The more households that sit outside the squeeze, the more rate rises it takes to slow the economy. That raises the risk of overshooting for the borrowers who are exposed.
Property prices are doing some of the work
One channel is working. House prices are sliding, and bank research points to a further 10% fall by mid-2027. The same research links a drop of that size to roughly a 1.5% fall in consumption, as people feel poorer and pull back.
But most owners are still better off than they were two years ago, so the wealth effect is gentler than it sounds. It is also lopsided: the high end of the market is falling faster than the rest, and the stock sitting unsold suggests sellers are slower to accept new prices than buyers are to offer them.
The dollar and the jobs market are not helping
Normally a higher cash rate lifts the Australian dollar, which makes imports cheaper and eases inflation. That has barely happened. The currency climbed from 65 to 72 US cents and now sits around 69, but other central banks are also tightening, so Australia has not gained much of an edge.
The labour market tells a similar story. Unemployment is 4.6% and has barely moved, thanks to steady hiring in health and care. Those jobs are less sensitive to interest rates, so they keep wages and spending ticking along.
Is further tightening overkill?
The governor wants a small rise in unemployment towards 5%. Markets are pricing one more increase, in May 2027, though one bank strategist sees upside risk to rates.
The tension is plain. If the cushions are doing so much work, the RBA may feel it has to go further to get the same effect. But the borrowers who cannot cushion themselves, and a housing market already sliding, would carry the cost of that. Policy lags are real, too: some of the earlier hikes are probably still working their way through, and further hikes risk piling on before the full effect shows.
What to do with this
Treat the cash rate as a range, not a point. If you hold a variable loan, check how much buffer you would have if rates ran higher than markets now expect, and consider whether parking spare cash in an offset beats chasing a deposit rate.
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General info, not financial advice.
