Australians Do Not Understand Interest Rates

Interest Rates

Wednesday, July 22, 2026, at 5:02 pm

Wednesday, July 22, 2026, at 5:55 pm

The Reserve Bank of Australia raises interest rates to reduce inflation, but many Australians think it has the opposite effect.

In short:

The Reserve Bank says the public must understand its role in the economy for its policies to work.

About 60% of people think they understand the Australian economy well.

What's next?

The Reserve Bank will meet in less than three weeks to decide on interest rates, with a 20% chance of an increase.

The Reserve Bank is worried that many Australians do not understand what it is trying to do with interest rates, making its job harder.

A survey of 9,000 Australians found that about 60% thought they understood the economy well.

Fewer people understood economics in some groups, like younger people, women, and those with lower incomes.

The survey also tested Australians' knowledge of key economic ideas.

The Reserve Bank found big gaps in people's understanding of how it uses monetary policy and how interest rates affect inflation.

This comes after the Reserve Bank raised interest rates three times this year to control inflation, affecting many households.

The Reserve Bank surveyed 9,000 Australians in 2025 and early 2026.

Most people think higher interest rates mean higher inflation.

Inflation is a top concern for more than two-thirds of respondents.

Other concerns include employment, wages, and housing, especially for younger people and renters.

The survey also found a problem for the Reserve Bank.

Inflation is the top economic concern for Australians.

Despite being concerned about inflation, people do not understand how the Reserve Bank is trying to reduce it.

Only 25% of respondents correctly said higher interest rates would lead to lower inflation.

The report said this was not surprising because interest rates can affect inflation in different ways.

There are many effects that can work in different directions, leading people to different conclusions.

Research from the US shows that many people think higher interest rates will increase prices.

Economists think higher rates will reduce demand and inflation.

This difference affects public trust in the central bank.

Most respondents trust the Reserve Bank, but trust varies across the community.

Those with more knowledge of the economy and the Reserve Bank's goals have more trust.

More trust, lower inflation expectations

Higher trust is linked to lower inflation expectations, which is important for the Reserve Bank's policies.

The more Australians trust the Reserve Bank, the more effective its policies will be.

Inflation expectations are important because they can influence people's decisions and affect prices.

The Reserve Bank is not ruling out more interest rate increases, but the market is not convinced.

The Reserve Bank's statement said some firms are increasing prices due to cost pressures.

Short-term inflation expectations have eased but remain high.

The Reserve Bank has said inflation expectations are stable, but if they change, inflation will remain high.

This could mean higher interest rates for many mortgage borrowers.

Some forecast a rate hike in August.

The Reserve Bank has changed its communications strategy in recent years.

The governor now gives press conferences after each monetary policy meeting.

The Reserve Bank aims to help the public understand how monetary policy works and how decisions are made.

The next decision will be made in less than three weeks.

The market is pricing in a 22% chance of a 0.25 percentage point hike in August.

Economists are divided on what will happen to interest rates next.

Westpac's Leading Index shows that economic growth is slowing.

However, Westpac's head of Australian macro-forecasting said high inflation is still the main concern.

The June quarter CPI update on July 29 will be important for the August meeting.

Westpac expects inflation to be too high, leading to another rate increase.

See more ABC coverage.

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