When the Reserve Bank of Australia raises interest rates, it presents the move as technical, neutral, even inevitable. But what’s actually happening is a policy choice that deliberately slows the economy by squeezing households, suppressing wages, and increasing unemployment.
For decades, central banks have relied on a framework rooted in the Phillips Curve—the idea that inflation can be controlled by reducing demand, even if that means putting people out of work. The logic is simple: if people have less money to spend, prices stop rising. Critics argue this framework is too narrow for an economy shaped by supply shocks, concentrated corporate power, and structurally unequal bargaining relationships. The logic is wrong.
In fact, inflation in Australia has been driven significantly by supply shocks, price-setting power, and some demand pressure, not by overemployment or runaway wage growth. Inflation in Australian in recent years has not been driven by workers demanding too much. It has been driven by global energy disruptions, housing shortages, fragile supply chains, and by firms with the power to protect or expand their margins during periods of disruption.
Raising interest rates does not directly solve these problems. It does not build a single new home, lower global fuel prices, repair supply bottlenecks, or reduce concentration in dominant sectors. What it does do is hit mortgage holders, renters, and small businesses, those least responsible for setting prices in the first place. This is not a technocratic fix but a way of trying to manage inflation by putting the burden on those least able to bear it.
One of the deepest flaws in the RBA economic model on inflation is that it treats market power too lightly. The RBA is following the conventional view that assumes firms are mostly passive price-takers responding to wages and demand, when in reality many sectors of the modern economy are dominated by large firms with the capacity to lift prices, defend margins, and exploit disruption.
Research from the Australia Institute argues that corporate profits played a material role in Australia’s inflation surge, and that the burden of adjustment has fallen far more heavily on workers than on owners of capital. In that account, wages did not initiate the inflation spike; instead, real wages fell while profits rose, exposing the weakness of any story that treats labour income as the main inflationary threat.
If inflation is treated mainly as a labour-market problem, then the solution becomes slower growth, weaker bargaining power, and higher unemployment. If market concentration and pricing power are part of the story, then competition policy, anti-gouging measures, and targeted taxation belong much closer to the centre of the response.
Interest rate hikes do not affect everyone equally. They fall hardest on younger Australians with mortgages, renters facing rising housing costs, small businesses reliant on credit, and workers whose wages are already struggling to keep pace with prices. Meanwhile, people with substantial assets are often better insulated, and capital income has not attracted the same alarm from policy makers as wage growth. This asymmetry reveals a deeper bias: workers are treated as inflation risks, while profits and dividend flows are treated as normal or invisible.
Monetary policy can reduce inflation, but it does so by slowing the economy, cooling demand, and often weakening workers’ bargaining power. When inflation is driven by supply shocks, concentrated market power, and housing constraints, this approach places the heaviest burden on mortgage holders, renters, and wage earners while doing little to fix the underlying causes.
There is also a deeper institutional issue. The government retains a rarely used statutory override mechanism under section 11 of the Reserve Bank Act 1959. That power has never been formally invoked in its modern form, but it has been threatened historically. After WWII the RBA raised interest rates against the government’s wishes. Ben Chifley responded by invoking the power that later became Section 11: he forced the Governor and Deputy Governor out and made clear the government would not tolerate the central bank defying elected authority.
Central bank independence has never been absolute and has always existed within a democratic framework in which elected governments can, at least in principle, intervene when monetary policy is causing broader social harm. Unfortunately, Treasurer Jim Chalmers has deferred to the orthodox view that interest rate hikes are the primary—and most responsible—tool for managing inflation.
Central bank independence and market confidence should not mean a commitment to an economic framework that remains wedded to disciplining labour while treating market power and profit-led inflation as secondary concerns because there is an alternative approach. Because inflation is driven by supply constraints and corporate pricing power, then the response should target those pressures directly.
- Temporary windfall taxes on sectors earning extraordinary profits, especially energy, can reduce inflationary pressure without cutting jobs or wages.
- Faster housing construction, energy investment, and supply-chain resilience are essential because inflation cannot be solved sustainably without addressing shortages.
- Fiscal policy can target excess demand more precisely than monetary policy, especially by focusing on high-income consumption rather than imposing broad pain across indebted households.
- Stronger competition policy and measures against abusive price-setting can limit the ability of dominant firms to turn crisis into opportunity.
Australians are told there is no alternative to raising interest rates as is simply the responsible thing to do. But it is irresponsible for a government, especially a Labor government, to accept higher unemployment, weaker wage growth, and stalled opportunity as the unavoidable price of stability.
A genuinely responsible approach would start with a better question: not just how to lower inflation, but who is made to pay for doing so. If the answer is always workers, renters, and mortgaged households, then the problem is not only inflation. It is the narrowness of the model being used to fight it.
Very well stated Fadlullah.
Here is a summary:
WHO PROFITS MOST FROM INTEREST RATE RISES?
Answer: BANKS
Which banks, and what are annual profits?
CBA ~$10.2B — ANZ: ~$7.4B — NAB: ~$7.7B — Westpac: ~$7.2B
Who are the Banks’ biggest Shareholders
1) BlackRock: ~6.3%, 2) State Street: ~6.0%, 3) Vanguard: ~6.0%
(All US owned companies)
Finally, Who Wins vs Who Loses?
Winners: Banks, and subsequently their shareholders
Losers: Mortgage holders, borrowers
This is social justice 101. The central problem is that the people with the majority of the money are making the rules. They are legally squeezing ordinary people harder and harder as workers and also with higher than ever prices for necessities, so they can make more money off the working population and stuff their own pockets, ironically thinking they deserve this. And if you wake up to this, or to the ongoing colonial wars, they call you a radical.