Interest rates have risen (again) following the Reserve Bank of Australia’s latest decision. While most people feel the impact through their mortgage or business lending rate, the mechanism behind it can feel a bit mysterious and unexplained. So, I am here to lift the veil on these rate rises.

WHAT IS THE RBA?

The Reserve Bank of Australia (RBA) is Australia’s central bank. Its main job is to help keep the economy stable. This is achieved by managing inflation (the same pesky inflation you keep hearing about in the media being the cause of rate rises) and supporting sustainable employment.

WHAT DID THE RBA CHANGE?

The RBA sets a target cash rate, which is the interest rate banks charge each other for overnight loans. Although it’s a wholesale rate, it tends to flow through to many everyday rates, including variable mortgages, business loans and often savings rates. On 4 February 2026, the RBA decided to increase this cash rate as a strategy to slow down inflation.

WHO MAKES THIS DECISION – AND IS THE RBA INDEPENDENT?

Cash rate decisions are made by the RBA’s policy decision-makers, under its board structure. The RBA operates independently of day-to-day government direction, so it can make decisions focused on long-term economic stability rather than short-term politics.

WHAT DOES THE RBA LOOK AT WHEN DECIDING RATES?

The RBA doesn’t base decisions on a single number. It weighs a combination of factors, including:

• The Australian dollar and broader financial stability
• Inflation and whether it’s tracking back toward the target range
• Employment conditions and wages growth
• Household spending and business activity
• Housing conditions and credit growth
• Global economic events (such as oil prices, supply chain pressures, major economies)

WHAT DOES IT MEAN FOR HOUSEHOLDS AND BUSINESSES?

Rate rises generally make borrowing more expensive, which can reduce spending and demand over time, helping to ease inflation pressures. For savers, higher rates can sometimes mean improved returns on deposits. The practical impact will differ from household to household, business to business, depending on debt levels, cash flow and how quickly lenders pass changes on.

WHY IT CAN FEEL UNFAIR

Interest rate rises can feel unfair because they don’t impact everyone evenly. They work mainly through the borrowing channel (raising repayments for mortgage holders and increasing interest costs for businesses with debt) while many households with little or no debt may feel the pressure far less, or even benefit from higher returns on savings. In other words, the policy tool used to slow the economy can end up putting disproportionate share of the “pain” on those who are already most exposed to interest costs, even though inflation is often driven by a broader mix of factors than mortgage spending alone.

Ultimately, the RBA is trying to strike a difficult balance: slowing inflation without stalling the economy. While rate rises can be painful, understanding why they happen helps you make clearer decisions around cash flow, borrowing and savings. If you’re feeling the squeeze, it’s worth reviewing your budget, debt structure and upcoming commitments now, rather than waiting for the next announcement.

Written for you by Keira Borg