Australia's four interest rate rises this year have not yet fully hit the economy, with household spending still growing despite the cash rate being at a 15-year high. Economists say the surprising result shows the hikes may be less effective at fighting inflation than they used to be, potentially paving the way for more increases.
What the RBA is trying to achieve
The Reserve Bank has raised its key cash rate to cut household spending and discourage businesses and workers from seeking higher prices and wages, aiming to bring inflation back under 3%. Financial institutions now face higher funding costs and have responded by lifting the rates they charge for home loans, business loans or bonds for big companies.
But eight months on from the year's first rate rise in February, spending is not going backwards. Economic activity has slowed, businesses are less efficient and real wages are going backwards compared with a year ago as inflation rises. Australian household spending has accelerated, up nearly 7% compared with a year ago, according to Australian Bureau of Statistics estimates.
Why spending keeps rising
Part of the increase in spending is from higher prices for essentials such as fuel and food, but it also reflects strong demand for electric cars and non-essentials, particularly overseas travel. Inflation has risen to 4% as of August, both because of oil disruption and mass construction of big projects like datacentres and because local businesses are lifting their prices. When customers are willing to spend big, businesses find it easier to raise prices.
The cash rate's most immediate effect is on household cashflow, taking money away from borrowers while giving more to debt-free savers. RBA data shows higher rates and prices have left 2% of borrowers unable to afford essential expenses, but most people are meeting repayments.
Offset accounts and home ownership
Warren Hogan, the managing director of EQ Economics, says the emergence of mortgage offset accounts in the last decade has reduced rates' effect on cashflow. Borrowers who have spare cash in offset accounts, often because they can afford to pay more than their minimum, now have "massive buffers". Australians now hold nearly $350bn in total in offset balances.
Home ownership is in decline, meaning more Australians are renters whose spending is not directly hit by higher mortgage rates. One in three households own their home debt-free and benefit from higher interest on their savings. Commonwealth Bank data indicates older Australians and debt-free homeowners have steadily increased their spending this year.
House prices and exchange rates
The slide in house prices is a sign that interest rates and higher borrowing costs are directly restricting economic activity, according to David Bassanese, the chief economist at BetaShares. House price slides are also an indirect channel for hikes to slow spending as homeowners tend to cut back when falls in home values make them less wealthy. RBA research suggests a 10% fall in housing prices – expected by mid-2027 – will cut consumption by 1.5%.
The Reserve Bank says the most important effect of interest rate rises is through the exchange rate. Higher interest rates tend to push up demand to invest in Australia, lifting the Australian dollar and making imports cheaper. But the dollar has been fairly stable because foreign central banks like the US Federal Reserve are also lifting their own rates. The Australian dollar rose from 65 US cents in November 2025 to 72 in May 2026, after the first three RBA rate rises, but has fallen to 69 US cents.
Unemployment and future hikes
Interest rate rises aim to push up unemployment, but the hikes have had little effect this year. More jobseekers make it easier for businesses to find workers without lifting wages, and higher wages would be passed on as higher prices, so more unemployment tends to mean less inflation. But the jobs market has been surprisingly strong, with health and care sectors rapidly hiring thanks to bigger demand and government subsidies while productivity goes backwards.
RBA governor Michele Bullock has said she wants to see a small increase in jobless rates to reduce pressure from wages on prices, drawing criticism from unions. Unemployment increasing from 4.6% to 5% would represent an extra 60,000 people out of work if the workforce stayed the same size. But Bullock said after September's rate hike that she does not expect job losses, instead hoping job creation will slow and more people will look to join the workforce.
Markets expect only one more rate rise and not until May 2027. Deutsche Bank strategist Lachlan Dynan warns rate rises' weaker effects add to the risk of another hike. "The Australian household sector has been more resilient to hikes than many expected," Dynan says. "Risks to RBA [rates] are back to being skewed to the upside in our view."
