Australia’s economic Groundhog Day: another rate rise, but the costs keep coming
- Written by: The Times
The Reserve Bank has raised interest rates again as oil pushes up prices across the economy. Borrowers are being asked to spend less, while many of the forces driving their bills remain beyond their control.
The Reserve Bank raised the cash rate by 0.25 percentage points to 4.60 per cent on Tuesday. It said global oil disruptions were pushing up energy prices, businesses were passing some higher fuel costs on to customers, and inflation remained too high. The RBA also warned that further rate rises were possible.
For households with a mortgage, the instruction is familiar: absorb a higher repayment and cut spending elsewhere. Yet a family cannot negotiate the global oil price. A small business cannot end a conflict in the Middle East. A remote town that relies on diesel for electricity cannot make its fuel costs disappear by shopping less.
That is the uncomfortable limit of the interest rate response. Higher rates can restrain demand and reduce the risk that one price shock spreads through the economy. They cannot produce another barrel of oil or deliver a cheaper shipment of diesel.
Oil reaches far beyond the petrol station. It moves food from farms to shops, supplies machinery and helps deliver almost every physical product Australians buy. In some remote communities it also helps generate power. The RBA says higher fuel prices have already begun flowing into the prices of other goods and services.
The latest available inflation figures show why the bank is concerned. Consumer prices rose 3.5 per cent in the year to July, while trimmed mean inflation, which removes some unusually large price movements, was 3.6 per cent. The August figures are due later today.
Growth without enough capacity
Australia has also relied on population growth to support economic growth. More people mean more workers, customers and taxpayers. Migration brings skills and substantial benefits to the country.
But a larger economy does not automatically make each person better off. New residents also need housing, transport, power, water, schools and health care. When those services and assets do not expand quickly enough, competition for scarce capacity can add to prices. Building what is needed then requires money, workers and materials at a time when all three are under pressure.
The distinction between economic growth and productivity matters. Productivity measures how much the economy produces from the resources it uses. The Productivity Commission reports that labour productivity fell 0.2 per cent in the year to June 2026. The RBA says weak productivity continues to constrain Australia’s potential growth. Those figures do not show that migrants caused the problem. They show that population growth has not, by itself, solved it.
Governments face a difficult choice. Delaying infrastructure can leave housing and services under greater strain. Building it can add to demand for labour and materials now, and to public financing costs. Neither course offers an instant cure for inflation.
Who pays for the adjustment?
Higher interest rates can benefit some savers through better deposit returns. For borrowers, the effect is more immediate. Mortgage repayments can rise, businesses face dearer credit, and investors must reconsider projects that made sense when borrowing was cheaper.
The property market feels both sides of that pressure. Buyers can borrow less, while builders and developers face higher financing costs. That may cool prices, but it can also make the task of adding new homes harder. The RBA says housing prices have already fallen in most capital cities and new housing loans have declined noticeably.
None of this makes the RBA’s decision pointless. Allowing inflation to persist would also damage households, especially those with little room in their budgets. The question is how much of the burden interest rates can reasonably carry when oil supply, productivity, housing capacity and public spending also shape the outcome.
Australia’s economic Groundhog Day is the search for a single fix: grow the population to strengthen the economy, build urgently to accommodate that growth, raise rates to contain the pressure, then find relief for those hurt by the rates.
Each step has a reason. The trouble comes when the costs of one decision become the reason for the next.
The Times View: Interest rates can buy time and curb spending. A lasting improvement depends on producing more, building capacity where it is needed and reducing exposure to costs Australia cannot control. Otherwise, households may keep paying for yesterday’s solution while waiting for tomorrow’s.
