Rate rises: but in whose interest

By Dr Martha Knox-Haly 

Let’s get straight to the essentials. One, the Reserve Bank of Australia is not doing its job (and raising interest rates is not going to help the RBA do its job either). Two, the RBA is making inflation worse in some cases when it raises interest rates. Three, the Reserve Bank of Australia is not independent, nor should it be legislatively given the illusion of independence. I am indebted to Dr Bronwyn Kelly’s recently published book ‘The Public Interest Economy’, which has helped me understand these three points with blinding clarity.

Starting with the first point, the original Reserve Bank Act 1959, clause 10 stated:

It is the duty of the board within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and the powers of the Bank under this Act, the Banking Act of 1959 and the regulations under that Act are exercised in such a manner as, in the opinion of the Board, will best contribute to:

a. the stability of the currency of Australia

b. the maintenance of full employment in Australia; and

c. the economic prosperity and welfare of the people of Australia.

The original act made no reference to inflation or interest rates, it was focused on currency stability and prosperity for all Australians. This began to change when the Howard Government introduced the Charter of Budget Honesty Act 1998. The Act was introduced to reduce financial risk to the government by eliminating excessive debt, reducing risk from public ownership of trading enterprises, assets and liabilities and preventing erosion of a tax base.

Now Australia is monetarily sovereign meaning the Australian Federal Government issues its own currency. How can you run out of money, when you make the money???? So the idea that a Government has to balance its books was a nonsense, and an act of political misdirection by the Howard Government. It was designed to make ordinary Australians accept cuts to public services. Further despite the attempts to reduce government risk, public sector outsourcing does not reduce legal risk under common law. The risk still exists because Government is responsible for its agents.

Selling off public sector enterprises certainly does not reduce political risk. The strategy of privatisation was simply designed to transfer public resources to the private sector, and to weaken the capacity of the public sector to provide governance and oversight. We are all personally aware that privatisations have not benefitted regular Australians, but some individuals have become very wealthy indeed.

In November 2024, The Reserve Bank Act was ammended. The changes now required the RBA’s monetary policy board to determine the monetary policy of the bank to stabilise prices in Australia, to maintain full employment in Australia and stabilise Australia’s financial system.  The Reserve Bank’s role was to prevent banks from destabilising the financial system to prevent credit crashes. The Statement on the Conduct of Monetary Policy-Reserve Bank was an agreement between the Treasurer Jim Chalmers and the Reserve Bank Board on the 10th July 2025. The agreement provided full operational autonomy to the RBA’s Monetary Policy Board, underlining the RBA’s goals of price and inflation control.

Somehow the ‘economic prosperity and welfare of all Australians’, got swapped out for keeping the banking sector stable. Now whilst the concepts might be related, stabilisation of Australia’s financial system is no guarantee of either economic prosperity or welfare for all the people of Australia. The RBA has also completely reinterpreted the term ‘full employment.’

Specifically the RBA’s statement of monetary policy explains ‘to achieve its statutory objectives, the Bank sets monetary policy to keep inflation in the economy to 2%-3%, and employment at the desired level that is consistent with maintaining low and stable inflation. In other words, there always has to be a level of ‘natural’ unemployment to avoid inflation.  Dr Kelly notes that even when inflation is within the RBA’s desired target range of 2-3%, the RBA does nothing to stop unemployment rising by lowering interest rates.

Kelly points out that pools of unemployed people suppress wages, depressed wages (as has been the case for Australians since 2011), low growth and low prices are beneficial for those who make money from money – or the wealthy. Once upon a time Australia did run on a policy of full employment from 1945 to 1973, where unemployment rarely rose above 2%. This was achieved through Government spending which created sufficient demand for available labour, but more about that later.

The RBA is responsible for Australia’s monetary policy. This involves setting interest rates on the cash rate (on overnight loans in the money market). The cash rate interest rates affect other interest rates, impacting borrowers, lenders, production and inflation. To achieve it’s statutory objective, the RBA sets monetary policy to keep inflation in the economy to 2-3%, and employment at the maximum level that is consistent with achieving sustainable economic growth. Governor Michelle Bullock has admitted that the RBA is basing its actions on the expectations of inflation, rather than direct observation of inflation. The RBA relies on the NAIRU (the non accelerating inflation rate of unemployment). The NAIRU cannot be directly observed or measured, it can only be inferred. My colleague, economist Katy Swain, hillariously calls the NAIRU, the RBA’s ‘invisible friend.’

Dr Kelly notes that Australian borrowers have experienced raised interest rates 60% of the time, since the RBA started targetting inflation in the 1990s. She estimates that Australian borrowers should have had lower interest rates 70% of the time, This is the concept of neutral interest rates because inflation was already sitting in the target range of 2%-3%. By extension, this means that 70% of the time, Australian borrowers should have been paying lower prices on their borrowing.

So does this single party trick actually impact inflation? There seems to be little evidence that it does, and some evidence that raising interest rates makes inflation worse. During the early 2000s, Australian inflation had been dealt with through Government surpluses or price capping, rather than through the expedient of supressing consumer spending power with raised interest rates. Australia did experience cost-push inflation following the pandemic and the Russia Ukraine war. But these effects began to subside as countries found workarounds for supply chain constrictions, and the Government provided energy rebates and other forms of subsidies.

After supply chain issues were resolved, this was followed by corporate price gouging which pushed inflation up (see Australia Institute research). This factor also eventually settled, although some price gouging continued. This pattern was replicated globally. All of this happened independently of what the RBA  or any central bank was doing with interest rates (Japan kept interest rate changes low during the pandemic for example).

None of these factors could be changed by the RBA’s interest rate choices. But according to the Australian Bureau of Statistics Living Cost Index, the cost of living for all households (except for self funded retirees) rose faster than inflation as measured though the CPI. This was due to sky rocketting mortgage payments (the costs of which were added to by the RBA raising interest rates). Dr Kelly comments that there is little evidence that low inflation rates in the 21st Century ‘as little more than coincident” with the RBA modifying interest rates.’ As per my earlier point, the balance of evidence is that interest rate tinkering has not helped reduce inflation, and in some cases it has made inflation worse.

So who actually benefits from interest rate rises? Interest rate increases do benefit those making money out of money (a financialised economy) such as banks, investment houses, fund managers and large mature corporations. This is to say mature corporations with established market share, which invest profit into interest bearing vehicles, rather than into increasing production requiring more workers.

Noted economist Scott Fullwiller observes that there is a fundamental misconception about how interest rates are set by central banks. Interest rates are a decision of the Reserve Bank Board. This is to set the target rate for inter-bank lending of reserves. Government borrowing and lending is derivative from this interbank cash rate as a risk premium. Borrowing and lending depends on the terms of the bonds involved. These bank reserves do enter the non financial sectors of the economy. The cash rate secures superior rates of return (depending on the risk premium) for financial sector investment. The welfare of us commoners does not get much of a guernsey – so much for prosperity of all Australians.

So if I can summarise the evidence at this point: the invisible friend (the NAIRU) is used to justify  human suffering through unemployment and depressed wages. The NAIRU is based negative expectations of inflation, rather than a present problem of cost-push inflation. Prosperity and well being for all of us and currency stability, have been jettisoned in favour of stability of Australia’s financial system and prices. Most of the time Australian mortgagees are paying higher rates more frequently than they should have, and modifying interest rates is just one way of tackling inflation. Raising interest can actually make inflation worse for mortgage holders, and recent changes in 2024 to the RBA’s legislation is highly beneficial to entities which make money from money.

There is a disconnection between the RBA’s stated objectives, the RBA’s original legislative obligations and the RBA’s actions. This neatly segues to my third assertion – that the RBA should not be provided with the illusion of legislative independence. The RBA is a public sector organisation, and as such should be subjected to democratic oversight by the peoples’ elected representatives. Under the Statement of Monetary Conduct, Treasury can pick new appointments for the RBA Board from a short list compiled by the Secretary of Treasury, the Governor of the Reserve Bank and an Independent party. The Secretary of Treasury is an ‘ex officio member of the Board’, and is not the over-riding decision maker about board appointments. The Secretary of Treasury ‘does not act at the direction of the Treasurer’. These statements make it clear that board membership rests with bureaucrats, not democratically elected representatives.

This method of board selection is a problem. Historically in America and Brittain, when economies tanked during the Great Depression or the Global Financial Crisis, the Central Banks are always bought under the control of Treasury departments. This is because inadequately regulated financial sectors will cause economies to crash and burn. When an economy derails, central bankers don’t have the tools or expertise to get the economy back on the right track. Therefore central bankers must be accountable to the Government.

Dr Kelly notes that since the RBA has been split off from Treasury, the RBA has developed an institutional resistance to lowering interest rates even when unemployment is rising or when inflation is within its target range. The RBA has retreated from the full scope of its legislated role confining itself to a single party trick – interest rates can be pushed up a little or down a little, and nothing more. As Dr Kelly notes the RBA has eschewed its responsibility to ensure that its portion of supply of money to the economy is:

1. sufficient to buy what can be produced at current prices
2. sufficient to provide for full employment.

Instead, the interest rates have been set at a level that facillitates overseas investment and benefits those entities which make money from money – banks and established corporations. The finance sector and corporations therefore have a vested interest in stopping the Government from being able to influence private sector borrowing and investment. The Government could proactively control inflation by raising taxes strategically or having strong consumer protections to stop price gouging. This would require integrated decision making the RBA observably responsible to Treasury. Taxation and better public sector oversight is clearly an anathema to the wealthy, so the rest of us peasants have to suffer rising interest rates, unemployment and more expensive mortgages.

It is hard to escape the conclusion that RBA’s operational independence is not an act of realpolitik designed to keep the Government out, and the rest of us down. The illusion of RBA independence creates barriers to the Government being able to use of all the tools at its disposal (spending, taxing, and developing the public sector). RBA’s operational autonomy is starting to look like a deliberate strategy to hobble democratically elected government. As Dr Kelly has commented protection from Government interference, does not protect the RBA from the risk of state capture by the finance sector.

Dr Kelly has suggested that the RBA could be either fully integrated within Treasury as a branch, or that a secondary Board best established within Treasury which has complete oversight of the RBA’s Monetary Policy Board. However, corruption prevention research demonstrates that organisations struggle to effectively regulate functions that are outside organisational boundaries, so my preference is for the RBA to be fully integrated within Treasury.  The legislative illusion of Reserve Bank Independence needs to be banished. Apart from reversing the ammendments enacted in 2024, the Charter of Budget Honesty Act 1998, and the Statement on the Conduct of Monetary Policy-Reserve Bank should be revoked.

Looking at the second concern, which referred to protecting the stability of the taxation base. Taxes do not fund public services. During the pandemic, the Australian Federal government spent $291 billion in direct support.[1] In March 2020, the government’s balance at the RBA was $28 billion (in what is called the OPA or Official Public Account – which is where taxs are paid and recorded). So where did the money come from so quickly?

If the pandemic package had been based exclusively on taxes, the Government would not have been able to generate this money so quickly. The Government’s balance at the RBA OPA account actually increased during this time. The Government spent from the OPA account, and then reissued bonds. What happened was that $291 billion spending was ordered by the Government as an act of law. This law meant that the Reserve Bank generated the money by key stroke, which was then distributed to Australians through their bank accounts. This sequence of events is consistent with Modern Monetary Theory’s model of spending first, taxing second.

Although tax statements represent an individual tax payer’s tax payments as a percentage proportion of spending on welfare, health or education, this is a misdirection designed to make you think that your taxes are funding public services. Heck the proportion of money that I pay on groceries each week could be represented as a percentage of money allocated across different public services. It doesn’t mean that what I fork out at Woolworths is actually funding public services!

The money you pay in taxes cannot be traced to spending allocations on schools, hospitals, roads or the army. It cannot be traced because it is digitally zeroed out (destroyed from your account) at the time you pay your tax. The tax paid is recorded in the OPA account. Taxes are primarily used to smooth the distribution of money across the Australian population. So if you look at who is using strategies to reduce tax, you will also see the people who are hoarding money and causing it to be stuck with them. The yammering on about taxes funding public services is another deceit designed to make us accept cuts to public services. It is time we stopped letting ourselves get hoodwinked.

Dr Kelly suggests that Treasury needs to be the senior player ensuring that the full array of tools for fiscal policy can be deployed and prioritised. The Reserve Bank needs to support Treasury’s leadership by ensuring that the total money supply to buy at current prices and ensure optimum levels of demand to maintain full employment. Treasury and the Reserve Bank need to ditch the fictions that full employment causes inflation and that interest rates are the only strategy for controlling inflation. More use needs to be made of taxation and price capping to stop price gouging in Australia.

Dr Kelly argues that full employment offsets inflation. She presents the example of ensuring an adequate supply of publicly based health professionals means that there is sufficient labour supply to ensure that health treatment needs are meet. There is no need to seek treatments in highly priced private specialist or pay exhorbitant private health insurance premiums to cover private hospital stays. The Federal Government could also take on the role of actually constructing social housing, and providing public sector based apprenticeships.

Expenditure on health, housing and developing skilled workers prevents inflation because it ensures that demand is met with supply, removing the catalyst for inflation. Dr Kelly argues for Treasury to conduct research on how to distribute a workforce which will support a sustainable economy and the well being of Australians. All of these initiatives just require the Federal Government to have the will to fully fund the universal public services of health, education, social services, housing, construction and transportation. It also means that Australians have to demand a Reserve Bank which is not operationally autonomous and is answerable to the Federal Treasurer.

[1]Dr David Joy personal communication with John Haly, 8th April 2026.