Reserve Bank Governor Michele Bullock's current monetary policy headache might find an unlikely soundtrack in a legendary 1997 rap track from The Notorious B.I.G. As Australian borrowers steel themselves for potential bad news in the new year, the late rapper's phrase "Mo Money Mo Problems" cuts to the heart of a fundamental economic challenge.
The Inflation Equation: More Cash, More Issues
While not a formal financial thesis, Biggie's iconic song title perfectly encapsulates a core economic principle. Pumping excessive money into the system delivers short-term benefits but inevitably leads to long-term inflation pain. The RBA's entire remit revolves around managing the supply and cost of money. Keeping interest rates too low for too long makes borrowing cheaper, fuels spending, and ultimately devalues cash, a phenomenon households experience directly as rising prices at the checkout.
With inflation pressures building once more, the central bank has been forced to consider a policy reversal. A rate hike is now firmly on the agenda to cool the economy and stabilise prices. This marks a sharp turn from the optimistic forecasts of 2025, when many experts and financial markets prematurely banked on a series of interest rate cuts, underestimating inflation's stubborn resurgence.
Mixed Signals: Mortgage Pain vs. Economic Resilience
The mood has swung decisively. Major banks like the Commonwealth Bank and NAB now anticipate a rate increase as soon as February 2026. According to analysis from Canstar, such a move would add approximately $90 per month to repayments on a $600,000 mortgage, squeezing household budgets further.
However, not all the news is dire. For the RBA, the mere threat of a hike can be almost as effective as implementing one. Governor Bullock's stern rhetoric following the December meeting was a strategic tool, aimed at encouraging consumers and businesses to rein in their spending in anticipation of higher rates. This pre-emptive cooling could reduce the need for the bank to act aggressively.
Further cause for cautious optimism lies in a robust labour market. Australia's unemployment rate sits at a resilient 4.3%, defying earlier predictions that the rate hikes of 2022-2023 would trigger widespread job losses. This strength provides a crucial buffer for the economy. Additionally, a better-than-expected inflation reading in January could still persuade the RBA to hold fire.
The Uneven Burden of Rising Prices
The stark reality of the cost-of-living crisis is undeniable. In Perth, consumer prices have soared by 27% over the past six years, a surge accelerated by post-pandemic stimulus. The era of a $10 pint or a foot-long sub is a distant memory for many. This inflation has been profoundly unfair, acting as an arbitrary tax that hits some far harder than others.
While families have needed significant pay rises to keep pace—and not all have received them—other parts of the economy have shown remarkable resilience. Property prices, particularly in Perth, have skyrocketed, with the national housing market now valued at around $12 trillion. This growth was partly fuelled by the RBA's own pandemic-era policies of emergency-low rates and quantitative easing, highlighting the uneven distribution of inflation's impact.
Finger-pointing at specific culprits like gas prices, climate change policies, or the net-zero transition often misses the broader picture. While these factors contribute, the RBA has indicated it looks through such temporary shocks. The fundamental driver is the macro imbalance between overall demand and supply in the economy, heavily influenced by government and central bank policy.
The RBA's mandate is monetary policy—the management of money. As The Notorious B.I.G. succinctly put it, when it comes to stoking inflation, "mo money" and lower rates ultimately mean "mo problems." If rates do rise in February, the pain won't be confined to homeowners; businesses with debt and export industries will also feel the pinch, underscoring the critical and difficult mission to tame inflation.
