On Tuesday afternoon the Reserve Bank of Australia lifted the cash rate to 4.85 per cent, its fifth increase this year and the highest level in eighteen years. The decision was not unanimous. Six members of the Monetary Policy Board voted to raise, and three voted to hold. A divided board is not in itself a scandal, and healthy institutions disagree. But the split matters because of what came before it. As recently as September the Board moved as one. Within weeks a third of its members had concluded that another rise was not warranted. That is not the sound of an institution confident in its diagnosis. It is the sound of one whose own members are beginning to doubt that the instrument in its hand fits the problem in front of it.
That doubt deserves to be taken seriously and aired publicly, because the costs of the Bank’s decisions fall on people who have no vote in the boardroom: mortgage holders, small business owners, apprentices looking for placements, and workers whose hours are about to be trimmed. What follows is a critique of the Bank’s current approach. It does not say that the RBA is staffed by fools, or that inflation does not matter, or that the Bank should abandon its mandate. It says that the Bank is applying a tool it understands well to a situation that tool only partly reaches, and that the people paying for the mismatch have noticed even if the institution has not yet admitted it.
A Shock the Cash Rate Cannot Touch
Begin with the nature of the problem. A material part of the inflation impulse Australians have been living with comes from outside the country. Fuel and commodity prices, pushed upward by the conflict in the Middle East, have fed through into transport costs, input costs and ultimately the shelf prices households see. Australia has no say in how those prices are set. No decision taken in Martin Place will reopen a shipping lane, settle a regional war, or add a barrel to world supply.
The textbook defence of tightening in these conditions is that the Bank must prevent a supply shock from becoming embedded in expectations and wage-setting, so that a one-off jump in the price level does not become a lasting rise in the rate of inflation. That argument is not foolish, and it is the strongest card the Bank holds. But it carries an implicit condition that is rarely stated plainly: the response must be proportionate to the risk of embedding, and the risk of embedding must be real and evidenced rather than assumed. A central bank facing an external price shock has a choice between looking through the first-round effects and leaning against the second-round ones. The skill in the job lies in telling the two apart. What the public is entitled to ask is whether the Bank has made that distinction with care, or whether it has simply reached for the lever it has always reached for.
Higher domestic interest rates do not lower the world price of oil. They work by suppressing local demand until firms lose the confidence to raise prices and workers lose the leverage to ask for more. In the case of an imported fuel shock, that means deliberately making Australians poorer in order to offset the fact that a foreign event has made them poorer already. The household that pays more at the bowser is then asked to pay more on the mortgage, and the two bills arrive in the same week. The rate rise does not address the first cost. It piles a second on top and calls it discipline.
The Forecast as a Confession
The most revealing document in this whole episode is not the decision statement but the Bank’s own forecast. On the Bank’s projections, inflation stays above three per cent through much of 2027 and does not settle in the middle of the target band until around mid-2028. Consider what that means. After five increases in a single year, and with a sixth hardly excluded by anything the Bank has said, the institution’s central expectation is that it will take roughly another year and a half to achieve what it is supposedly securing now.
There are two ways to read that. The charitable reading is that the Bank is being honest about a slow and difficult disinflation, and that honesty is to be preferred to false promises. I accept that honesty is a virtue. But the forecast also invites a harder question. If inflation is going to take until mid-2028 to return to the middle of the band even with rates at an eighteen-year high, then either the rate rises are doing less than the Bank hopes, or the underlying drivers are mostly outside its reach, or both. In either case the marginal value of the latest increase is thin, while its marginal cost is concrete.
A monetary authority ought to be able to say what its last move bought. Not in the abstract language of transmission lags and policy stance, but in plain terms: this much less inflation, at this cost in jobs, over this period. The Bank’s own numbers suggest the answer is a modest reduction in a number that was going to ease on its own once the external pressures fade, purchased at a price that will be paid in full and up front. A policy whose benefits are speculative, delayed and shared with other forces, and whose costs are certain, immediate and borne by particular people, should face a high bar. The Bank has not shown that it clears it.
The Ledger of Costs
Those costs are not hypothetical. The unemployment rate has already risen to 4.7 per cent and is still moving upward. The Bank has been candid, in its own way, that higher unemployment is part of the intended mechanism, since a cooler labour market is how demand is restrained and wage pressure contained. But the phrase “a softer labour market” sounds clinical until it is translated. It means a graduate who cannot get a first job. It means a fifty-five-year-old made redundant in a regional town with few alternatives. It means casual workers whose shifts are cut before anyone is formally dismissed, and who therefore never appear in the sympathetic accounts of the unemployed.
Then there is housing. A weaker property market is also an intended or at least accepted consequence of tightening, and for some it is welcome news, since it improves affordability at the margin for people shut out of the market. But the effect does not fall evenly. Recent buyers with thin equity and large loans are exposed to the combination of higher repayments and falling prices. Rising mortgage stress is not a side effect to be noted in a footnote. For a family that bought at the top, it can mean the loss of the home. The Bank cannot claim the affordability benefits of a falling market while treating the distress at the other end as an unfortunate externality.
Small business gets less attention than it should. Firms that borrowed to expand, or that run on overdrafts and equipment finance, face higher interest costs at the same moment that their customers are pulling back. Many of these firms are not marginal operators but sound businesses with real employees, caught between a revenue squeeze and a cost squeeze. When the Bank speaks of a greater risk of insolvencies, it is describing the closing of shopfronts, the end of trades and the loss of accumulated local knowledge that does not return when rates eventually fall. A business that fails because of a temporary policy setting is not restored by a later reversal of that setting. This is the irreversibility problem at the heart of the case against overtightening: inflation, once defeated, stays defeated, but a destroyed business stays destroyed too, and the two errors are not symmetrical in how recoverable they are.
The Meaning of a Six-Three Vote
Return, then, to the split. Three members of a nine-person board looked at the same data as their colleagues and judged that the case for another increase had not been made. We do not yet know their reasoning in detail, and the minutes will tell us more. But the very fact of dissent is informative. It tells us that the Bank’s own expert members, with access to everything the staff has produced, see a live argument for pausing.
A pause is not a surrender. It is a recognition that policy operates with long and variable lags, and that the effects of four earlier increases this year are still working their way through household budgets. Fixed-rate loans are rolling onto higher rates month by month. Consumers are still adjusting spending. The prudent course when the cumulative effect of past decisions has not yet been observed is to wait and watch, not to add further tightening on the strength of a forecast that may prove too pessimistic about the inflation outlook or too optimistic about the economy’s resilience. The three dissenters appear to have understood that. The majority’s decision to proceed anyway has the character of a commitment to a trajectory rather than a response to the latest evidence.
There is also a communications problem. Each hike delivered on a divided vote is a hike whose credibility is weaker than the last. If markets and households come to believe that the Board is close to its limit, the tightening loses some of its expectation-anchoring force, which is the one benefit the Bank can most plausibly claim for it. Ironically, then, pressing ahead against internal doubt may undermine the very credibility the Bank is trying to protect.
A Public That Has Not Consented
Central banks like to describe themselves as independent, and independence is valuable. It insulates monetary decisions from the electoral cycle and the temptation to run the economy hot before a poll. But independence is not the same as immunity from accountability, and it does not dissolve the question of social licence. A policy that imposes large, concentrated costs on the public depends, in the end, on the public’s willingness to bear them.
On the evidence, that willingness is running out. Consumer confidence has fallen to levels not seen since the recession of the early 1990s, a period that older Australians remember not as a statistic but as a time when the economy broke and took people’s livelihoods with it. Cost of living remains the issue that dominates voter concern. And the public’s account of who is responsible does not match the Bank’s. A large share of Australians do not accept that prolonged pain from rate rises is the necessary medicine. They tend to blame government spending, and in doing so they are making a political argument about whose job it is to restrain demand and by what means.
One need not agree with that popular view to see its significance. The Bank’s approach rests on an unspoken bargain: the public tolerates a period of hardship in return for the restoration of price stability. When confidence is this low and blame is this clearly directed elsewhere, the bargain is under strain. Unions have called for a pause, warning that workers are at their limit. That is an advocacy position, and unions are interested parties. But it expresses something broader than organised labour. People feel that they have been asked to carry the burden repeatedly, and that no one has explained why the burden should be theirs alone.
If there is a dispute about whether fiscal policy has contributed to inflationary pressure, it ought to be resolved in the open, with the Bank saying clearly what it believes and what role other arms of policy should play. Instead the Bank is left doing the heavy lifting through the one channel it controls, while the broader policy mix escapes scrutiny. When monetary policy becomes the only instrument anyone is willing to use, it will be used harder than it should be, and the people subject to it will reasonably ask why.
Who Gains, Who Pays
There is an asymmetry in the way rate rises distribute their effects that the Bank has been reluctant to discuss. Earlier in this cycle, rising rates widened the net interest margins of the major banks and contributed to very large profits, before competition for borrowers eventually eroded some of those gains. The transmission was swift and one-directional. Households absorbed the full and immediate cost through higher repayments and tighter credit, while lenders captured a margin windfall.
I do not suggest the Bank sets policy to enrich the banks. The point is narrower and harder to dismiss. A policy whose mechanism is to transfer income from borrowers to lenders, and which delivers its benefits unevenly and with a lag, should be assessed honestly for what it does to distribution as well as to the aggregate inflation number. A mortgage holder whose repayments have risen by hundreds of dollars a month is not an abstraction in a model of the output gap. That household has been asked to subsidise, in effect, the restoration of an index. Meanwhile the institutions that intermediate the transfer do well from it, at least for a time.
When a central bank continues to insist that the pain is worth it, it makes a claim about relative value that its audience is not obliged to accept. Worth it to whom? The economist looking at a chart sees a path back to target. The family refinancing at a higher rate sees a lost holiday, a postponed repair, perhaps a sold car. Those are not commensurable by sleight of hand, and the Bank’s confidence that the trade is justified would be easier to credit if it were accompanied by a franker account of who bears the cost and who does not.
An Institutional Preference for the Familiar Tool
Why does the Bank persist? The answer, I suspect, is not malice or incompetence but something more ordinary and more difficult to correct. Institutions develop habits of mind. The RBA’s formal framework is inflation targeting, its principal instrument is the cash rate, and its professional culture rewards the demonstration of resolve. A central bank that eases too early and sees inflation return is remembered as having failed. A central bank that tightens too far and tips the economy into unnecessary unemployment is, by contrast, remembered more gently, since the counterfactual is invisible and the blame is diffuse. That asymmetry of reputational risk biases the institution toward overtightening, and it does so quietly, through the accumulation of individually defensible judgments.
I do not deny that tightening can restrain domestic demand and help anchor expectations. That mechanism is not broken, and it would be dishonest to pretend otherwise. If inflation were being driven chiefly by overheated domestic demand, the case for this approach would be strong and I would not be writing this essay. But the conditions have changed. A significant part of the inflation problem is external. The labour market is softening. Confidence is at multi-decade lows. The public is rejecting the costs. When so many of the circumstances that justified the instrument have shifted, continued reliance on it looks less like rigorous inflation targeting and more like an institutional preference for the familiar tool, applied by reflex after the conditions that recommended it have altered.
The best test of whether a policy is analytical or merely habitual is whether it responds to new information. The Bank’s own forecasts show the horizon for returning to target being pushed out. Its own Board is divided. The labour market data are turning. Each of these is the kind of signal that ought to prompt a reassessment. Instead the Bank has reaffirmed its direction and added another quarter point.
What a Better Approach Would Look Like
Criticism is cheap unless it points somewhere, so it is worth saying what a more defensible posture might involve. First, a pause. The Bank has delivered a great deal of tightening in a short time, and the lagged effects are still arriving. Holding the cash rate steady while the data accumulate would cost little if the inflation outlook proves as persistent as the Bank fears, because the option to resume would remain. It would cost a great deal less than the alternative if the three dissenters turn out to have been right.
Second, a clearer distinction between the inflation the Bank can influence and the inflation it cannot. The Bank should publish, in terms the public can follow, how much of the current overshoot it attributes to imported fuel and commodity prices, how much to domestic demand and wage dynamics, and what it expects each rate decision to do to each component. If the honest answer is that further tightening does little about the imported component, the Bank should say so, and say what that implies for the proportionality of its response.
Third, a franker public account of the trade-off. The Bank speaks of bringing inflation back to target, but the cost side of the ledger is described in softer language than the benefit side. If the Bank’s own analysis implies a particular rise in unemployment as the price of a particular reduction in inflation, that exchange rate should be stated openly, so that the public and their elected representatives can judge whether it is acceptable. Democratic legitimacy cannot be maintained by technocratic reticence.
Fourth, a more serious conversation about the policy mix. If the public and many economists believe that fiscal policy has been adding to demand, then the burden of restraint should not rest on monetary policy alone. The Bank is entitled to say so plainly, within the limits of its role, and the government is obliged to answer. A situation in which one institution does all the restraining, and the others avoid the argument, is the surest way to produce excessive tightening.
The Risk of Overshooting
The central danger of the present course is overshoot. Monetary policy works with lags, and the economy is currently absorbing the effects of a year of increases. If the Bank continues to tighten on the strength of a forecast, it may find that the slowdown it has engineered arrives with more force than intended: unemployment rising faster than projected, business failures clustering, household spending contracting sharply. At that point the Bank will cut, and it will be praised for its flexibility. But the people who lost their jobs or their businesses in the interval will not be compensated by a later reduction in rates. The correction comes too late for them.
Meanwhile, the external pressures that drove part of the inflation will, in the ordinary course of events, fade on their own timeline. Conflicts settle or stabilise, supply chains adapt, commodity prices move. The Bank’s own forecast implicitly acknowledges as much when it sees inflation easing through 2027 and into 2028. There is a real prospect that a significant share of the disinflation the Bank will eventually claim credit for would have occurred anyway, and that the unemployment and insolvency it caused along the way were a cost paid for little.
That is the heart of the matter. A central bank is entitled to take hard decisions and to accept that some of them will be unpopular. What it is not entitled to do is persist in a strategy once the evidence that supported it has weakened, and once its own Board has begun to divide over whether to continue. Humility in the face of uncertainty is not weakness; it is the proper posture of an institution that knows its tools are blunt and its forecasts fallible.
Conclusion
The RBA’s decision on Tuesday was defensible on the narrowest reading of its mandate, and it was supported by a majority of those entitled to vote. But a defensible decision is not necessarily a wise one. The Bank has raised rates five times in a year against a backdrop in which a significant portion of inflation originates abroad, the labour market is weakening, confidence has collapsed, and a third of its own Board saw no case for another rise. Its forecasts concede that the road back to target is long. Its tool of choice imposes costs that are immediate, concentrated and irreversible on those who bear them, while the benefits are partial, delayed and shared with forces beyond its control.
The Bank’s task is not to prove its resolve. It is to restore price stability at the lowest sustainable cost to the people whose economy it manages. By that standard, the present course deserves a harder look than it is getting. The three members who voted to hold may yet be vindicated. Even if they are not, their dissent is a reminder that there was an alternative on the table, that it was reasonable, and that the Australians who will live with the consequences of this decision deserve a central bank willing to keep asking whether the familiar tool is still the right one.
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Bakchos is the founder of Blak and Black, an Australian media and advocacy platform established in 2010. Bakchos writes from the intersecting perspectives of Wiradjuri heritage, Jewish identity, and humanism.
© Bakchos, November 2026
