As a mortgage broker working with households and business owners across the Hunter, I see interest rate changes land in very real, very local ways, from a tradie’s equipment finance, to a café’s cash flow, to a family trying to hang onto their mortgage while rents keep climbing.
The Reserve Bank of Australia (RBA) uses the cash rate as its primary tool to keep inflation in check. In simple terms: higher rates make borrowing more expensive and saving more attractive, which slows spending and credit growth. When inflation is being driven by too much demand across discretionary categories, this approach has historically worked well.
But the question many of us are asking now is whether the inflation we are fighting looks like the “classic” demand-driven problem, or whether rate rises are becoming a blunter instrument for today’s inflation mix.
The most recent ABS data showed CPI rising 3.8 per cent over the 12 months to December 2025, and the biggest contributor to annual inflation was housing. This distinction matters because housing costs are not optional. While households can cancel a holiday or delay purchasing a new car, they cannot easily cancel rent, council rates, insurance, or electricity.
Electricity is a prime example of why rate hikes can feel mismatched to the problem. Price changes in utilities are frequently driven by structural and policy factors, including the unwinding of government rebates and transition costs, which do not respond quickly to a modest reduction in household spending. The ABS noted electricity and rents as key cost-of-living pressures in the latest CPI commentary, and the RBA has similarly flagged electricity as an area where prices have moved rapidly due to specific supply factors.
Rate rises do not impact the broader economy uniformly; they hit individual demographics unevenly. Indebted households feel higher repayments immediately, while some savers and deposit holders actually receive more interest income, which can blunt the intended slowdown in demand.
The RBA classifies this as the “cash-flow channel”: higher rates reduce spending power for borrowers but can increase income for savers. In an ageing population, this distributional effect matters even more because a larger cohort holds savings and may be less sensitive to higher rates than younger, heavily indebted households and small businesses trying to grow.
In the Hunter, tight rental conditions are a constant topic. Newcastle, Maitland, and the broader region have faced the same supply dynamics seen nationally. Vacancy-rate tracking illustrates how constrained many local rental markets have been.
This creates a structural complication: when housing supply is tight, higher rates can increase investor mortgage costs and reduce new construction activity, which can keep rental pressure elevated. The RBA’s own research suggests the level of housing demand relative to housing stock is the key driver of rents, meaning supply constraints remain the core issue.
Interest rates remain effective at slowing credit growth and moderating discretionary demand. Where they are less effective is when inflation is being pushed along by supply constraints and essential services, such as energy, housing, insurance, and logistics, that do not quickly respond to rate settings.
The right question is not whether rate rises work at all, it is whether we are leaning too heavily on them to solve problems that require broader solutions. Sustainable inflation control needs a bigger toolkit: planning and construction settings that increase housing supply, alongside energy investment and infrastructure decisions that reduce volatility and long-run costs. Relying on rates alone risks concentrating the stress on borrowers and smaller operators without fully addressing the underlying drivers of prices.
IMAGE | Brad East
