Inflation, the RBA and the rate-rise cycle

Update, 30 September 2026: rates are rising again. The Reserve Bank has lifted the cash rate four times in 2026, to 4.60%. Read Is Albanese government spending pushing up your interest rates?

Priya works three days a week at a childcare centre in Sydney's outer west and spends much of the rest of her time running the family finances, a job that got harder very quickly. She and her partner bought their first home, a modest three-bedroom house on a new estate, in early 2021, when the Reserve Bank of Australia's cash rate sat at a record-low 0.10 per cent and their bank told them a fixed-rate loan would lock in at under 2 per cent. They took the variable rate instead, on advice that rates had "nowhere to go but sideways." Eighteen months later, that advice looked like the costliest piece of financial guidance either of them had ever received. Between May 2022 and November 2023, the Reserve Bank raised the cash rate thirteen times, from 0.10 per cent to 4.35 per cent (RBA, Cash Rate Target, 2022–2023) — the fastest, steepest tightening cycle in a generation. Priya's monthly repayment rose by well over a thousand dollars across that stretch (approx.; illustrative of a typical variable-rate loan of the size taken out in 2021 — individual loans vary). At the same time, her grocery bill and the cost of filling the car both climbed sharply, because the same inflation driving the rate rises was also driving the price of almost everything else she bought. She was being squeezed from two directions that felt like one problem, but which the primary record shows to be two connected, distinct stories: a global inflation shock, and Australia's own policy response to it.

Priya's experience was close to universal. Roughly a third of Australian households carry a mortgage, and most home loans in this country are variable-rate, meaning Reserve Bank decisions land on family budgets within weeks (approx.; RBA, Financial Stability Review). The scale of the shock, and the scale of the response, raise the two questions this topic exists to answer. First: how much of the inflation that triggered thirteen rate rises came from overseas — broken pandemic supply chains, the energy shock that followed Russia's invasion of Ukraine — and how much was generated at home? Second, and just as important: while the independent Reserve Bank was trying to cool the economy, was the elected government's own spending helping that effort or working against it? The answer matters well beyond one election cycle, because it decides whether the next inflation shock, whenever it comes, finds Australia with room to respond.

What the government did — and what it does not control

Australia deliberately separates who controls inflation-fighting interest rates from who controls government taxing and spending. The Reserve Bank of Australia, established under the Reserve Bank Act 1959, sets the cash rate — the rate at which banks lend to each other overnight, which flows through to mortgage and business borrowing rates across the economy — independently of the elected government (Reserve Bank Act 1959 (Cth)). The Treasurer sets the Bank's broad inflation target, currently 2–3 per cent on average over time, through a periodic Statement on the Conduct of Monetary Policy, but does not direct the Reserve Bank Board on individual rate decisions, and no Treasurer in the period covered by this article attempted to (RBA, Statement on the Conduct of Monetary Policy). Fiscal policy — how much the government spends, taxes and borrows — is a separate lever, decided in the Budget each year. Both levers affect the same thing: how much demand is chasing how much supply. When they pull in the same direction, inflation is easier to control. When they pull in opposite directions, one lever has to work harder to offset the other.

Between the 2022 election and mid-2025, the Albanese government made several fiscal choices that sit directly inside this story. Its first two Budgets delivered a headline cash surplus — roughly $20 billion in 2022-23, the first Commonwealth surplus in fifteen years, and roughly $15 billion in 2023-24 (approx.) — driven mostly by a temporary windfall from company tax receipts and iron ore and coal prices well above budget forecasts, and by welfare spending coming in lower than expected as unemployment stayed low (Budget Paper No. 1, 2023-24 and 2024-25; Final Budget Outcome, 2022-23 and 2023-24). At the same time, the government rolled out targeted cost-of-living relief: the Energy Bill Relief Fund, delivering rebates of several hundred dollars to most households and eligible small businesses from mid-2023, funded jointly with the states; two increases to the base rate of Commonwealth Rent Assistance; cheaper medicines under the PBS; and a substantial rise in aged-care worker wages following a Fair Work Commission decision (Budget Paper No. 2, 2023-24). In mid-2024 it redesigned the already-legislated Stage 3 income tax cuts to direct more of the benefit to low- and middle-income earners, bringing the redesigned cuts into effect from 1 July 2024 — squarely inside the Reserve Bank's tightening cycle. Underlying all of this, Commonwealth payments as a share of GDP, after the extraordinary pandemic-era spike, settled at a level above the pre-COVID decade's average rather than fully retreating to it (approx.) (Budget Paper No. 1, various years; Parliamentary Budget Office, medium-term fiscal projections). None of these decisions was hidden, and each had an explicit, defensible purpose on its own terms. Whether their combined effect helped or complicated the Reserve Bank's job is the empirical question the rest of this topic tests.

The government's own public framing of these measures was consistent throughout: Treasurer Jim Chalmers repeatedly described cost-of-living relief as designed to take pressure off inflation rather than add to it, arguing that targeted, temporary payments — unlike an untargeted stimulus — would lower measured prices without materially adding to aggregate demand (approx.; Treasurer's Budget speeches and press conferences, 2023–2024). That is a genuine and orthodox economic argument, not a fig leaf; well-designed subsidies that reduce a specific cost, rather than hand out general spending power, can in principle be less inflationary than their dollar value suggests. Whether the redesigned Stage 3 tax cuts, which put money directly into pay packets rather than offsetting a specific bill, fit that same description is a fair question this topic returns to below.

The evidence: what the primary record shows

The inflation shock, in the ABS's own numbers

The Australian Bureau of Statistics' Consumer Price Index, the country's official inflation gauge, tracks the cost of a fixed basket of goods and services a typical household buys, measured against the same basket a year earlier. It sat at a historically tame 0.9 per cent through 2020 (approx.), as lockdowns and one-off measures like free childcare briefly pushed some prices down (ABS, Consumer Price Index, Australia, 2020). It climbed through 2021 as the reopening economy collided with the world's broken supply chains, reaching around 3.5 per cent by the December quarter — already above the Reserve Bank's target band, though the Bank judged much of it temporary at the time (ABS, Consumer Price Index, Australia, Dec-2021). Then it accelerated. By mid-2022 annual CPI had reached roughly 6.1 per cent (approx.), and by the December 2022 quarter it peaked at 7.8 per cent — the highest annual rate recorded since the early 1990s (ABS, Consumer Price Index, Australia, Dec-2022 quarter, released Jan-2023). From that peak it eased only gradually: still above 6 per cent through the first half of 2023, down to around 4.1 per cent by the end of that year, and not back inside the Bank's 2–3 per cent target band on its preferred trimmed-mean measure until sometime in 2024–25 (approx.) (ABS, Consumer Price Index, Australia, various quarters, 2023–2025).

How much of the shock was imported

Breaking the basket apart tells a directional story. In 2022 the sharpest increases were concentrated in goods and inputs Australia buys from the rest of the world rather than services produced locally — economists call this split "tradables" versus "non-tradables" inflation. Automotive fuel prices rose sharply through 2022 (approx.), tracking the global oil-price spike that followed the invasion of Ukraine, before easing back the following year (ABS, Consumer Price Index, Australia, Transport group, 2022–2023). New dwelling construction costs also rose fast, as global shipping and materials costs and domestic trade-labour shortages combined (approx.) (ABS, Consumer Price Index, Australia, Housing group). The Reserve Bank's own Statements on Monetary Policy through 2022 and early 2023 repeatedly attributed most of the acceleration to global factors — freight costs, energy prices and goods shortages — rather than to domestic demand (RBA, Statement on Monetary Policy, 2022–2023). Australia's 7.8 per cent peak, notably, sat below the peaks reached in the US, the UK and the euro area (approx.), consistent with the country being a net energy exporter rather than an energy importer during an energy-price shock. Food told a similar story at first: much of the early acceleration in food prices tracked global grain, fertiliser and freight costs rather than domestic market conduct, though a 2024 competition inquiry also raised separate concerns about supermarket pricing behaviour worth examining on their own terms, covered in this site's analysis of groceries, food inflation and market power (approx.; ACCC, Supermarket Prices Inquiry, 2024). But the picture shifted through 2023 and 2024: as global shipping and commodity pressures eased, the components keeping inflation above target increasingly became services-based and domestically generated — rents, insurance, other household services — rather than imported goods (RBA, Statement on Monetary Policy, 2023–2024). Wage growth offers a further check on how much of the persistence was homegrown. The Wage Price Index rose more slowly than prices for most of the tightening cycle, meaning real wages fell for an extended period rather than chasing prices upward in the kind of self-reinforcing wage-price spiral seen in some earlier inflation episodes overseas (approx.; ABS, Wage Price Index, 2022–2024). The Reserve Bank and Treasury both pointed to that restraint as evidence Australia's inflation was not primarily a wage-driven story, at least in its first two years — a debate this site's analysis of real incomes and the household recession covers from the household side. That changed at the margins from 2023, as minimum-wage decisions, Budget-funded aged-care wage rises, and enterprise-bargaining outcomes lifted wage growth back above its pre-pandemic trend even as productivity stalled — a combination this site's analysis of union influence, wages and productivity examines directly. That shift matters for the fiscal-monetary question, because domestically generated inflation is precisely the kind that responds to how much the government, as well as the Reserve Bank, is adding to or subtracting from demand at home.

How Australia's cycle compared to its peers

Comparing central banks side by side sharpens the global-versus-domestic question further. Nearly every advanced-economy central bank tightened hard over the same window. The US Federal Reserve lifted its policy rate from near zero to a peak of roughly 5.25–5.50 per cent by mid-2023 (approx.; US Federal Reserve, Federal Open Market Committee decisions, 2022–2023); the Bank of England raised its Bank Rate to a peak of around 5.25 per cent (approx.; Bank of England, Monetary Policy Committee decisions, 2023); and the European Central Bank lifted its deposit rate to a peak of around 4 per cent (approx.; European Central Bank, Governing Council decisions, 2023). Measured by the size of the move, Australia's cycle — 0.10 per cent to 4.35 per cent — sat toward the milder end of that group; both the US and UK central banks pushed their policy rates higher in absolute terms over a similar or shorter span. That comparison supports the global-shock reading of how the cycle began: central banks with no relationship to the Australian government were fighting the same fire, at similar or greater intensity, at the same time. The comparison gets more interesting on the way down. Several peers, including the US Federal Reserve and the Bank of England, began cutting rates during the second half of 2024 as their own inflation readings eased (approx.; Federal Reserve and Bank of England policy decisions, 2024). The Reserve Bank of Australia held its peak rate for longer, into 2025, before its first cut. Some of that gap reflects genuine differences in each economy's inflation dynamics — Australia's labour market stayed unusually tight, and its housing-cost pressures differ structurally from the United States'. But the comparison at least raises, rather than settles, the question this topic is built around: whether a fiscal setting not consistently working with the Reserve Bank is part of why Australia's central bank needed more time than some of its peers to be confident inflation was beaten.

What it did to the household budget — and the small-business ledger

Priya's monthly repayment shock shows up in the aggregate data too. Scheduled mortgage repayments rose to a near-record share of household disposable income across the tightening cycle, even as the share of borrowers falling behind on repayments stayed relatively low by historical standards — a sign that low unemployment, not comfort, was what kept most households afloat (approx.; RBA, Financial Stability Review, 2023–2024). Households responded by cutting discretionary spending and running down savings built up during the pandemic: the household saving ratio fell from double digits in 2021 to a low single-digit figure by 2023–24 (approx.) (ABS, Australian National Accounts, Household Income Account). None of this fell evenly. Younger households and recent buyers, who took out larger loans relative to income at the bottom of the rate cycle, absorbed the largest proportional increase in repayments — the same cohort examined in this site's analysis of the housing affordability emergency. The same mechanism reached small businesses through variable-rate business loans and overdrafts, which repriced in step with the cash rate: a business carrying debt of a similar scale to Priya's mortgage faced a comparable jump in its monthly interest bill, at the same time its own customers were spending less (approx.; RBA, Statement on Monetary Policy, business finance chapters, 2023–2024). Higher borrowing costs also raise the bar a business has to clear before a new piece of equipment, a shopfit or an extra hire pays for itself — a small but real drag on the investment this site's analysis of the productivity collapse identifies as the missing ingredient in Australia's growth story.

The Reserve Bank Board voted for every one of the thirteen rate rises. It did not vote for the spending that came with them.

Fiscal policy: helping the Reserve Bank, or working against it

The clearest evidence of tension sits in how officials themselves described the period. In testimony to the House of Representatives Standing Committee on Economics, Reserve Bank officials said on more than one occasion that some government spending measures — Commonwealth and state — were adding to demand in the economy at the same time monetary policy was trying to remove it (approx.; RBA Governor, testimony to the House of Representatives Standing Committee on Economics, Hansard, 2023–2024). The Bank also drew a specific, technical distinction that matters here: it repeatedly said it would "look through" the direct, mechanical effect of government energy rebates on the measured CPI figure, because a rebate lowers the number households see on their bill and in the official statistics without necessarily reducing the underlying inflationary pressure building elsewhere in the economy (RBA, Statement on Monetary Policy, 2023–2024). That is a real and defensible distinction, but it also means the government's own signature relief measure made headline inflation look better than the Bank judged the underlying economy to be — two numbers moving apart because of a fiscal decision, not because inflation was actually beaten.

The Stage 3 tax cut redesign is the clearest single example of the timing problem. It was announced, defensibly, as cost-of-living relief for low- and middle-income earners. But it took effect on 1 July 2024 — a date chosen by the electoral and legislative calendar, not by the inflation cycle — and it landed while the cash rate was still sitting at its 4.35 per cent peak, put there specifically to reduce household spending power, not restore it (Budget Paper No. 2, 2024-25). State governments added their own layer of demand on top: large infrastructure pipelines, including Victoria's Big Build and equivalent programs in New South Wales and Queensland, kept construction-sector labour and materials markets tight through the same period the Reserve Bank was trying to cool the broader economy, a dynamic this site's analysis of Labor states and the debt mountain examines in more detail. None of these were reckless decisions in isolation. Together, they describe a fiscal setting that was, at multiple points across 2023 and 2024, adding to the same demand the Reserve Bank was trying to subtract.

One further layer of demand sat outside the headline Budget surplus altogether. Vehicles such as the Housing Australia Future Fund, Rewiring the Nation and the National Reconstruction Fund commit tens of billions of dollars to housing, energy transmission and industrial investment, but sit off the underlying cash balance because they are structured as investment funds rather than direct spending — a structure this site's analysis of off-budget funds and the accounting question examines in full (approx.; Budget Paper No. 2, various years). Money spent through these vehicles still buys concrete, steel, transmission towers and construction labour in the same tight, capacity-constrained economy the Reserve Bank was trying to cool. It adds to demand the same way on-budget spending does, even though it does not appear in the surplus or deficit figure the government leads with. A headline surplus that excludes billions of dollars of demand-adding investment is not a false number, but it is an incomplete one for judging how much the government's overall fiscal stance was helping, or hindering, the fight against inflation.

The critique: two levers, two directions

The steel-man case holds for the opening act of this story and should not be diluted: the initial 2022 surge was overwhelmingly imported, and the Reserve Bank, not the Treasurer, set every rate decision. Where the critique bites is what happened next. As global freight, energy and commodity pressures eased through 2023, the inflation that remained increasingly reflected conditions the government could influence — a labour market at full employment, a construction sector stretched by public infrastructure spending, and household demand cushioned by targeted relief and, from mid-2024, a large tax cut. "Coincided with" is not "caused by," and this article does not claim the government caused the 2022 inflation shock — it plainly did not. But from 2023 onward, the more precise claim is that fiscal policy did not consistently help unwind the shock it had not caused, and at points actively worked against the tool assigned to unwind it.

The clearest measure of that cost is time. The Reserve Bank held the cash rate at its 4.35 per cent peak for roughly fifteen months, from November 2023 until its first cut in February 2025 (approx.) (RBA, Cash Rate Target, 2023–2025) — longer than the pause seen in some peer economies, where central banks began easing through the second half of 2024 as their own inflation readings fell back toward target (approx.; US Federal Reserve, Bank of England and European Central Bank policy decisions, 2024). Reasonable economists disagree about how much of that extra patience reflects genuinely stickier domestic inflation versus a fiscal setting working against the Bank; both were almost certainly true to some degree. What is not seriously disputed is that a central bank trying to cool an economy does its job faster and with less collateral damage — fewer months at the peak rate, less mortgage stress compounding month after month — when government spending is not simultaneously adding fuel to the same fire it is trying to put out. Every additional month at the cycle peak is a month of higher repayments for households like Priya's, and a month of higher borrowing costs for the small businesses this site profiles elsewhere on the site.

Independent monetary policy can absorb a global shock. It struggles to absorb one that is being topped up at home.

There is a structural dimension to this too, beyond any single Budget decision. Commonwealth payments settling above the pre-COVID share of GDP is not, on its own, proof of poor fiscal management — some of that increase reflects genuine, popular and arguably necessary commitments, from aged-care wages to disability support. But a fiscal position that structurally expands rather than structurally tightens during a period when monetary policy is trying to remove demand from the economy is, by definition, not counter-cyclical. Counter-cyclical fiscal policy — spending less, relatively, when the economy is overheating, and more when it is weak — is the textbook complement to an independent central bank. The record over 2022–2025 shows a government that ran temporary surpluses on the back of a commodity windfall it did not create, while its underlying spending base kept growing. That combination let the government claim credit for fiscal discipline in the headline number while the RBA did most of the underlying work of actually cooling the economy.

The cost of that arrangement compounds rather than stays flat. Every extra month the cash rate sits at its peak is a month in which households like Priya's spend less on everything but the mortgage, which weakens consumer demand across the broader economy — the very thing higher rates are meant to do — but it is also a month in which small businesses facing weaker trade and higher loan repayments at once are more likely to delay hiring, defer an upgrade, or close altogether. A monetary-policy cycle that runs longer than it needs to does not just cost more in interest; it costs more in foregone investment and, eventually, in the productivity and wage growth that investment would have supported, linking this topic directly to the slow-moving damage this site's analysis of the productivity collapse documents on its own terms.

What they got right, and the honest caveats

Credit is due on several fronts. Unemployment stayed remarkably low throughout the tightening cycle — around 3.5 per cent at its lowest, among the lowest readings in half a century, and still below 4.5 per cent through most of 2023–24 (approx.) (ABS, Labour Force, Australia, 2022–2024). Few forecasters, including at the Reserve Bank itself, thought the labour market could absorb rate rises this steep without a much sharper rise in joblessness, and it did not — the "soft landing" many doubted was possible substantially occurred. The relief measures were also, on balance, targeted rather than an untargeted cash splash: energy rebates, rent assistance and cheaper medicines directed support at the households facing the most acute pressure, a design choice that limits, even if it does not eliminate, the inflationary impulse compared with a broad-based handout. The two budget surpluses genuinely reduced the pace of new Commonwealth borrowing at a moment when global bond markets were volatile and borrowing costs were rising everywhere, a real fiscal achievement whatever its cause. And, importantly, the government did not publicly pressure the Reserve Bank to cut rates despite intense political pain among mortgage holders — a form of institutional restraint that should not be taken for granted, given how central banks have come under direct political pressure in other countries during this same period.

The honest caveat cuts the other way on measurement, not intent. Government rebates that mechanically lower the headline CPI number can make inflation look more beaten than the underlying economy actually is, which is exactly why the Reserve Bank said it was looking past them. That is a genuine communication and measurement problem, not evidence of bad faith — but it means readers, and at times commentators, may have taken more comfort from falling headline inflation figures in 2023 than the underlying data supported. Both things can be true at once: the relief measures helped real households doing it tough, and they complicated the public's ability to judge how close the country actually was to the Reserve Bank's target.

It is also fair to note that the Reserve Bank itself did not read this shock perfectly in real time, and the lesson here is not solely a government one. Through 2021 the Bank's own public guidance suggested the cash rate was unlikely to rise until 2024, on the view that the inflation pick-up would prove temporary (approx.; RBA, Statement on Monetary Policy, 2021). That forecast proved wrong within months: the first rate rise came in May 2022, roughly two years earlier than the Bank had guided. An independent review of the Bank's operations, commissioned by the Treasurer and reporting in March 2023, examined exactly this kind of forecasting and governance question and recommended structural reforms, including splitting the Reserve Bank Board into a dedicated Monetary Policy Board and a separate Governance Board, which Parliament legislated in 2024 (RBA Review, Mar-2023; Reserve Bank Reform legislation, 2024). A central bank that was itself surprised by how persistent this inflation shock turned out to be is a fair part of the record, not just a complicating factor for the government to wear.