RBA Concerned Public Misunderstanding of Interest Rates Hinders Inflation Fight

The Reserve Bank is concerned that too many Australians have little idea what the central bank is trying to achieve with interest rates, which it says could be making its job harder.

A survey of 9,000 Australians shows about 60 per cent of respondents thought they had a good understanding of how the Australian economy works.

The proportion of people who said they understood economics well was lower across some demographics, "including younger cohorts, females, and lower income earners", the RBA survey found.

In addition to rating their own understanding, the survey also tested Australians' knowledge of key economic concepts.

The RBA said there were "fundamental gaps" in the public's understanding of how the central bank used monetary policy, and particularly about how interest rates affected inflation.

The findings follow the RBA hiking interest rates three times this year in an effort to put a lid on inflation, leaving many households dealing with higher mortgage repayments on top of other cost-of-living pressures.

Most think higher interest rates mean higher inflation

Inflation was listed as a top-three concern by more than two thirds of respondents.

Other major concerns included employment and wages (more prominent among younger respondents) and housing (particularly for renters and younger cohorts).

The survey also pointed to something of an existential problem for the Reserve Bank.

Despite the concern about inflation, respondents largely did not understand how the RBA was trying to bring it down.

"Only 25 per cent of respondents assessed correctly that higher interest rates would ultimately lead to lower inflation, while more than half indicated that higher interest rates would lead to higher inflation," the report said.

The report authors described this as "not unexpected" due to the multiple ways rates affect inflation.

"There are multiple effects that could potentially work in different directions, including some effects that could lead people to the opposite conclusion if they are considered in isolation," they wrote.

The authors cited the research from the US that showed a large share of people expected higher interest rates to push up prices as the cost of doing business increased and firms lifted prices to cover costs.

In contrast, economists reasoned that higher rates would reduce demand and therefore inflation.

This mismatch has an adverse impact on public trust in the central bank, the survey results suggest.

Most respondents reported moderate to high levels of trust in the RBA, which it said was comparable with other Australian and international institutions and has been stable since early 2025.

But the central bank noted that "trust varies across the community, and is closely linked to understanding of the economy and perceptions of how the RBA operates".

It found those with greater knowledge of its objectives, higher economic literacy, stronger engagement with economic news, and higher levels of trust in people and institutions generally had higher trust in the RBA.

More trust, lower inflation expectations

Significantly, higher trust was associated with lower inflation exceptions, "highlighting that trust is important in its own right, and also for the transmission of monetary policy", the report said.

In other words, the more Australians trust the RBA and understand what it is trying to achieve, the more effective its policies.

This is where the rubber hits the road for the Reserve Bank — inflation expectations refer to how people's beliefs about where prices are heading can influence their decisions and therefore affect prices.

The opening paragraph in the RBA's monetary policy board's June statement, after leaving the cash rate on hold, read: "There are signs that some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so."

"Short-term measures of inflation expectations have eased but remain higher than earlier in the year," it said.

The RBA has previously said inflation expectations remain "anchored", but if this changes the RBA warns inflation will remain elevated.

This could mean higher interest rates for millions of mortgage borrowers.

Some forecasting August rate hike

The central bank's communications strategy has undergone several significant changes in recent years, after a major government-ordered review.

This includes the introduction of regular media conferences after each monetary policy board meeting.

"By providing clearer explanations of policy decisions and the factors underlying them, these media conferences aim to help the public better understand how monetary policy operates, how decisions are made and how those decisions could affect them," the RBA said in the survey report.

The next of those decisions will be made in less than three weeks' time, when the board next meets on August 10 and 11.

According to data from LSEG, the market is now pricing in a 22 per cent chance of an 0.25 percentage point hike in August.

Economists remain divided on where to next for interest rates.

On Wednesday, Westpac released its Leading Index, which it said confirmed that economic growth momentum is slowing.

However, Westpac's head of Australian macro-forecasting Matthew Hassan said "high inflation remains the [RBA board's] primary concern.

"As such, the June quarter CPI update on July 29 will be the critical reading ahead of the August meeting," he.

"On balance we expect it to show inflation running too high and a further [0.25 percentage point] rate increase from the RBA Board in August."