{"id":838531,"date":"2026-08-01T21:27:52","date_gmt":"2026-08-01T21:27:52","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/838531\/"},"modified":"2026-08-01T21:27:52","modified_gmt":"2026-08-01T21:27:52","slug":"the-reserve-bank-says-most-australians-dont-get-how-interest-rates-work-thats-a-fact-and-were-paying-for-it-2","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/838531\/","title":{"rendered":"The Reserve Bank says most Australians don\u2019t get how interest rates work. That\u2019s a fact and we\u2019re paying for it"},"content":{"rendered":"

July 31, 2026 \u2014 5:00am<\/p>\n

Save<\/p>\n

You have reached your maximum number of saved items.<\/p>\n

Remove items from your saved list<\/a> to add more.<\/p>\n

AAA<\/p>\n

It sounds a bit like an insult. But when the Reserve Bank says most Australians don\u2019t get how interest rates work, that\u2019s a fact.<\/p>\n

If you think higher interest rates push prices up and worsen the cost of living, you\u2019re in the majority. You would also be wrong (for the most part \u2013 we\u2019ll come back to that).<\/p>\n

\"ManyMany of us don\u2019t understand how interest rates affect inflation.Matt Davidson<\/p>\n

It might be through no fault of your own, but the fact most Australians misunderstand how interest rates work is making the Reserve Bank\u2019s job \u2013 and our lives \u2013 harder.<\/p>\n

Of course, most of us understand how interest rates affect us on a purely personal level. You might have a home loan you\u2019re trying to pay off or a savings account you\u2019re trying to grow. Both, as you know, are affected by interest rates.<\/p>\n

But one of the Reserve Bank\u2019s latest pieces of research<\/a> reveals most of us aren\u2019t clued in on how interest rates affect the broader economy, or how they affect public enemy number one: inflation.<\/p>\n

Related Article\"Illustration<\/a><\/p>\n

For the first time, a bunch of the bank\u2019s economists \u2013 led by Jack Harden, Peter Rickards and Michelle Wright \u2013 took a closer look at how Australians experience and understand the economy by conducting a survey.<\/p>\n

Their findings? They politely noted that there were \u201cfundamental gaps in understanding of how monetary policy works, particularly in how interest rates affect inflation\u201d.<\/p>\n

Only one in four Australians correctly said higher interest rates would lead to lower inflation. More than half gave the wrong answer, saying higher interest rates would lead to higher inflation. And one in four were unsure.<\/p>\n

That\u2019s despite Australians, across all demographics, indicating that inflation \u2013 or price growth \u2013 is their single most pressing economic concern.<\/p>\n

So, we care (a lot) about how fast prices are growing. But we\u2019re not very good at understanding how we can slow them down.<\/p>\n

Why does this matter? Because one of the big factors affecting how fast prices grow is how fast we expect them to grow.<\/p>\n

\"WhenWhen Michele Bullock raises interest rates, her goal is to curb consumer spending.Louie Douvis<\/p>\n

If a lot of us think that inflation will rise, meaning prices will climb faster in the future, we\u2019re likely to act in a way that makes it happen. Some might call it manifestation. But if you expect the price of cereal to go up in the next few months, you might decide it\u2019s a good idea to bring forward your purchases, stocking up on some extra boxes of the stuff before prices go up.<\/p>\n

If a lot of us do this, with a bunch of products across the economy, we end up pushing demand higher \u2013 and therefore prices across the economy higher.<\/p>\n

Related Article\"In<\/a><\/p>\n

But how does this relate to interest rates and the Reserve Bank? Well, the bank\u2019s focus is on keeping prices stable (and keeping people in jobs). They only have a few tools at their disposal \u2013 including setting the country\u2019s interest rates.<\/p>\n

Now, there are several ways that changing our interest rates affect inflation and the economy more widely.<\/p>\n

But put simply, when Reserve Bank governor Michele Bullock pushes interest rates up, her hope is that those of us with home loans see more money seeping from our bank accounts every month as our repayments become bigger, and that this causes us to stop spending so much on other things.<\/p>\n

It\u2019s painful, but it helps to dampen total demand for goods and services across the economy \u2013 either because people can\u2019t afford it, or because they decide they can go without it. Either way, higher interest rates are meant to make us stop pumping so much money into the economy, therefore bringing down prices.<\/p>\n

The problem is that the bank also relies on people believing prices won\u2019t keep surging.<\/p>\n

Bullock can\u2019t wave a magic wand to make us think this. But she can shape our expectations through a less fantastical approach called \u201cjawboning\u201d: using her words to warn<\/a>, for example, that interest rates might be on the way up.<\/p>\n

That should spook people a little and perhaps make them hold on to their money rather than go ahead and spend it.<\/p>\n

But here\u2019s the thing: if most Australians believe (wrongly) that higher interest rates will lead to higher inflation, doesn\u2019t that undermine the effectiveness of \u201cjawboning\u201d as well as the effect of interest rates themselves?<\/p>\n

Rather than believing the bank will ramp up its battle against inflation (by raising interest rates) and bring price growth down, it seems at least half of Australians will think the opposite: that higher interest rates will lead to higher inflation.<\/p>\n

And as we know, expectations for which way inflation will go can greatly affect the direction it does end up going.<\/p>\n

\"FiguresFigures this week showed inflation slowed in the June quarter.Louie Douvis<\/p>\n

Of course, there are plenty of factors at play, including on the supply side, when it comes to our stubborn inflation problem.<\/p>\n

But while fresh data this week showed the consumer price index (the main measure of price growth in Australia) slowed slightly to 3.8 per cent in the year to June<\/a>, \u201ctrimmed mean inflation\u201d \u2013 which is the inflation gauge the RBA pays more attention to \u2013 remained unchanged at 3.6 per cent. That is: price growth has been stuck above the bank\u2019s 2 to 3 per cent target range for a while despite it raising interest rates.<\/p>\n

Perhaps that\u2019s partly because Australians aren\u2019t responding to interest rates in the way we theoretically should. As the Reserve Bank\u2019s latest research notes, if people have a better understanding of how tools such as interest rates work, that can actually make monetary policy more effective.<\/p>\n

But a quick note on why you shouldn\u2019t feel too bad if you thought higher interest rates led to higher inflation.<\/p>\n

When we think about inflation, most of us think about cost of living. And when interest rates go up, not only does that increase our home loan repayments (a major living cost for some Australians), but it increases borrowing costs for businesses, which might lead them to pass on that cost to customers through higher prices.<\/p>\n

Economists will tell you, on that second point, that any price rises from increased business costs will generally be outweighed by the drop-off in demand as customers pull back their spending.<\/p>\n

But it\u2019s not completely silly that some people think higher interest rates push up their home loan repayments (which they do) and that therefore inflation (which is often used to talk about cost of living) would go up.<\/p>\n

The part that people might not know is that the consumer price index \u2013 the way we measure inflation \u2013 doesn\u2019t actually include home loan repayments.<\/p>\n

Related Article\"Single<\/a><\/p>\n

Why? First, because the impact of buying existing housing \u2013 which is typically a transaction between two households \u2013 means the effect on consumption in the overall household sector is effectively cancelled out.<\/p>\n

Second, if we included interest payments in the inflation measure, it would trap the Reserve Bank in a circular feedback loop where the thing they\u2019re measuring includes the tool they\u2019re using to manipulate it: interest rates.<\/p>\n

It\u2019s also because technically, when we buy a home, that\u2019s seen as both something we\u2019re consuming, and also something we\u2019re investing in. For simplicity, the actual building (such as the materials used) is the thing we\u2019re consuming. The \u201cland\u201d part of the purchase is the thing that tends to grow in value over time, so is classified as an investment.<\/p>\n

So, to measure housing costs, the Australian Bureau of Statistics looks mostly at the cost of building a new home (stripping out the cost of the land) \u2013 and rents that people are paying. That\u2019s seen as the imperfect but fair way to measure price changes in housing we\u2019re actually \u201cconsuming\u201d.<\/p>\n

It\u2019s also possible that many Australians link higher interest rates to higher inflation because the two can somewhat coincide. When prices start rising too fast, for example, we tend to see the Reserve Bank start raising interest rates. Higher interest rates don\u2019t cause inflation to be higher, but the two things are often seen happening at effectively the same time, which might explain some of the confusion.<\/p>\n

But as long as economic literacy remains weak in Australia, the Reserve Bank will have to crank interest rates harder to get the job done. If we want prices to grow more slowly, it starts with getting up to scratch on economics more quickly.<\/p>\n

The Market Recap newsletter is a wrap of the day\u2019s trading. Get it each weekday afternoon<\/a>.<\/p>\n

Save<\/p>\n

You have reached your maximum number of saved items.<\/p>\n

Remove items from your saved list<\/a> to add more.<\/p>\n

\"MillieMillie Muroi<\/a> is the economics writer at The Sydney Morning Herald and The Age covering workplace and economics. She was formerly an economics correspondent based in Canberra\u2019s Press Gallery and the banking writer based in Sydney.Connect via X<\/a> or email<\/a>.From our partners<\/p>\n","protected":false},"excerpt":{"rendered":"July 31, 2026 \u2014 5:00am Save You have reached your maximum number of saved items. Remove items from…\n","protected":false},"author":2,"featured_media":834619,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-838531","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/838531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=838531"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/838531\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/834619"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=838531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=838531"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=838531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}