Last Tuesday, the Reserve Bank lifted the cash-rate target another 25 basis points, to 4.60 per cent.
It was the fourth rise this year. The Bank says inflation remains too high, global energy prices have risen again, and higher fuel costs are now flowing into other prices. It also sees domestic capacity pressures, stronger-than-expected inflation data and elevated short-term expectations. In other words, the RBA is not pretending that a higher mortgage repayment will repair an oil pipeline in the Middle East. It is trying to stop a new burst of price rises becoming embedded throughout the economy.
That is its job. The question is whether interest rates should remain almost the only serious tool Australia uses to do it.
When rates rise, the immediate pain is not spread evenly through the population. It arrives first in the letterbox, or more likely the banking app, of people with a large mortgage. Recent buyers get it hardest. So do families who stretched to buy in a market already beyond the reach of many younger Australians. Renters are not protected either. Higher financing costs eventually find their way into rents, especially where vacancy rates are tight.
Meanwhile, a retiree with a paid-off home and money in term deposits may be better off. So may an investor with cash to lend. That is not a moral failing on their part. It is simply how the mechanism works.
The RBA cannot tailor a rate rise to the household that can comfortably absorb it. It has one blunt instrument, and it uses it on the economy as a whole. But the impact is anything but whole. A household with a big loan can lose hundreds or thousands of dollars a month. A household without one may hardly notice, or may receive more interest income.
That is a strange way to organise a national anti-inflation effort.
A good tool, used alone
None of this means that interest rates are useless or that the RBA should ignore inflation. Once people and businesses begin to expect prices to keep rising, they change their behaviour. Workers seek compensation. Firms lift prices in anticipation of future costs. Contracts, rents and wage claims begin to assume inflation rather than merely respond to it. Breaking that cycle is painful, but allowing it to run is worse.
Nor is the current inflation problem purely imported. The Bank is clear on that. Energy shocks matter, but so do local capacity constraints, weak productivity and spending that has proved more resilient than expected.
Still, raising rates deals with this mixture by reducing demand. It works by making borrowing more expensive and encouraging saving. That can be necessary. It is not automatically fair.
Australia has somehow accepted the idea that if the country needs less spending for a while, a fairly narrow group of households should supply most of the restraint. The people who bought a house recently are expected to spend less because their repayments have gone up. Around 3 in 10 households have mortgages. For home owners under 50 years of age, more than half have home loans. The rest of the country is invited to carry on, subject to whatever indirect effects filter through.
We would not design a tax system that way. We should be reluctant to accept it as the only available economic policy.
An old idea worth revisiting
John Maynard Keynes confronted a related problem in 1940. Britain was mobilising for war. Employment and incomes were rising, but the economy could not produce all the ordinary civilian goods people wanted as well as guns, ships and aircraft. More money chasing fewer goods would produce inflation.
Keynes’s answer included compulsory saving – deferred pay. Instead of taking income away permanently through taxation, the state could require people to put aside some part of their earnings for later release. Spending was restrained when goods were scarce, but workers retained a claim on the money they had earned.
Australia already has an institution built around deferred pay: superannuation.
That does not mean we should casually order every worker to put more money into super whenever inflation ticks up. Super is designed for retirement, not for fine-tuning the quarterly inflation number. Money preserved until retirement is a very long deferral indeed, particularly for a younger household paying rent or servicing a mortgage. A flat compulsory contribution could also hurt low-paid workers more than those with a comfortable buffer.
But the underlying idea deserves more respect than it usually receives. If the country needs to restrain spending temporarily, why is the only fast national mechanism a higher interest bill for borrowers?
Could Australia have a temporary, progressive form of compulsory deferred saving, with protections for low incomes and people in financial hardship? Could it be credited to individuals, invested safely and released under clear conditions once inflation had eased? Could it sit alongside targeted budget measures that reduce demand without asking one group of households to do all the heavy lifting?
Those are not questions the RBA should answer alone. They are questions for the elected government, Treasury, economists and the public.
There are objections. They matter.
The obvious objection is that taking money from a pay packet is still taking money from a pay packet. Of course it is. Someone whose weekly budget is already tight will not be comforted by being told that the withheld money remains notionally theirs.
That is why any such scheme would have to be progressive. Low-income workers, people receiving income support, and households in demonstrated hardship would need protection. It would need a defined purpose, a limited duration and a transparent release mechanism. It could not become another permanent deduction hidden in the small print of a payslip.
There is a second objection: governments are not good at temporary measures. Also true. A supposedly short-term savings scheme could become a tempting pool of money or a permanent feature of the tax system. The safeguards would have to be stronger than a ministerial promise.
And a third objection is institutional. The RBA is independent for a reason. Governments should not bargain with it behind closed doors: “we will do this if you refrain from doing that.” That would muddy responsibility and weaken confidence in both institutions.
The answer is not to put the Treasurer in the monetary-policy meeting. It is to stop pretending that monetary policy is the entire anti-inflation strategy. The RBA should retain its independence and use rates when it judges that it must. But governments should have credible fiscal and structural options ready when inflation threatens – and should be judged on whether they use them.
The real choice
There is no painless way to bring inflation down. Anybody offering one is selling something.
But there is a difference between pain that is shared and pain that is concentrated. A mortgage-rate rise may be economically defensible while still placing an unfair proportion of the adjustment on people who happen to have borrowed to buy a home at the wrong moment.
Australia is not starting from scratch. The Mercer CFA Institute’s 2025 Global Pension Index placed Australia seventh among 52 retirement-income systems and gave it a B+ rating. That does not make superannuation beyond criticism, or turn it into a short-term inflation switch. It does mean we already have a substantial national system of deferred savings – one that should at least be part of a serious conversation about how the burden of restraint is shared.
The rate rise announced last week may prove necessary. That is not the point.
The point is that Australia should be able to do better than repeatedly sending the same households the bill for an inflation problem created by wars, energy shocks, domestic bottlenecks and years of policy choices.
Interest rates are a necessary tool. They should not be the only one Australia knows how to use.
*Sources: Reserve Bank of Australia, “Statement by the Monetary Policy Board: Monetary Policy Decision,” 29 September 2026; John Maynard Keynes, “How to Pay for the War,” 1940; Mercer and CFA Institute, “Mercer CFA Institute Global Pension Index 2025.”