Interest Rates in Australia Aren’t the Real Problem — Policy Failures Are

Written by: Chris Mulcahy

Understanding the Real Issue Behind Interest Rates in Australia

If it feels like interest rate rises aren’t fixing anything, that’s because they aren’t.

There’s a growing frustration out there and it’s justified.

We’re hearing it every day from farmers, business owners and families across Australia. Things feel tight. Margins are under pressure, costs keep creeping higher, and confidence is fragile at best.

Yet despite all of that, the message coming from policymakers hasn’t changed. Interest rates in Australia need to stay higher to control inflation.

But what if that’s not just painful… what if it’s wrong?

Because when you step back and look at what’s actually happening on the ground, this doesn’t feel like an economy that’s overheating. It feels like one that’s being squeezed.

Across most developed economies, inflation is now largely under control and interest rates are either stabilising or starting to come down. Central banks are shifting their focus from tightening to easing. Australia, however, appears to be moving in the opposite direction. That alone should raise a serious question - are we really that different, or are we dealing with a fundamentally different problem?

The traditional approach assumes inflation is driven by too much demand. Raise rates, slow spending, and the pressure comes off.

And to be fair, part of that story still holds. There is still a significant amount of money moving through the system.

But that raises another uncomfortable truth.

Government spending remains elevated. Large amounts of money have been injected into the economy over recent years, and much of that is still circulating. When you have high levels of spending at the same time as supply constraints, you don’t reduce inflation, you fuel it.

So on one hand, we’re trying to slow the economy down through higher interest rates. On the other, we’re still pushing money into it.

Carefully examining bills as rising costs and interest rates in Australia make financial planning more challenging.

Those two forces are working against each other.

But even that’s only part of the picture.

Because when you look at what’s actually hitting businesses and households day to day, it doesn’t feel like excess demand is the dominant issue. It feels more like rising input costs, higher overheads, tighter margins and constant pressure on cash flow.

That’s not demand-driven inflation. That’s cost-driven inflation.

And when you follow those rising costs back to their source, one factor keeps appearing - energy.

Energy sits underneath almost everything we do. It powers farms, drives transport, supports manufacturing and flows through every supply chain in the country. When energy costs rise, it doesn’t stay contained. It spreads, quietly but powerfully, through the entire economy.

Which is why the recent shift in narrative is so interesting.

We’re now being told that rising energy costs are being driven by global instability. Conflict in the Middle East, disruptions to oil supply, and flow-on effects into critical inputs like fertiliser.

And to be clear, that’s absolutely true. Farmers are seeing it firsthand through increased input costs and higher fuel prices. Global supply shocks do matter.

But here’s where things stop adding up.

For the past few years, energy costs in Australia have already been rising significantly. Those increases weren’t driven by war, they were largely the result of domestic policy settings and the way we’ve approached our energy transition.

And as those costs flowed through the system, the response wasn’t to address energy. The response was to increase interest rates.

Now suddenly, with global conflict adding further pressure, we’re being told that energy costs are a key driver of inflation.

So which is it?

Because logically, it can’t be both. Energy either matters or it doesn’t. It either drives inflation or it doesn’t.

And if it does, then the uncomfortable truth is this:

Energy has likely been a major driver of inflation all along - we’ve just been using the wrong tool to deal with it.

Australia should have some of the lowest energy costs in the world. We are rich in natural resources, we have the scale, and we have the capability.

Yet businesses, farmers and households are paying more, not less. That’s not just bad luck or global pressure, that’s structural. That’s policy.

This is why interest rates in Australia continue to rise, but not necessarily solve the underlying issue.

Increasing interest rates don’t lower energy prices. They don’t increase supply. They don’t make fertiliser cheaper or transport more efficient.

What they do is reduce spending, increase financial stress, slow investment and place even more pressure on the people who are already carrying the load.

Which is why so many people are frustrated right now.

You’re dealing with higher costs, higher interest rates and more uncertainty, all at the same time and being told it’s necessary.

But from where you sit, it feels less like a solution and more like you’re absorbing the consequences of a problem that hasn’t been properly addressed.

We can’t control global conflict. We can’t control policy decisions. And we can’t control where interest rates go next. But we can control how we respond.

In environments like this, the focus shifts. It becomes less about chasing growth at all costs, and more about clarity, understanding your numbers, managing cash flow, stress-testing decisions and protecting what you’ve built.

Because when the external environment doesn’t make sense, internal discipline matters more than ever.

And maybe that’s the real takeaway here.

If energy costs are now being recognised as a key driver of inflation, and government spending is still injecting money into the system, then we need to ask a bigger question -not just how do we respond, but have we been trying to solve the wrong problem from the start?

Until that conversation shifts, the pressure on Australian businesses, farmers and families isn’t likely to ease anytime soon.

If any of this resonates, it’s worth taking a step back and reassessing your position - because in environments like this, clarity is everything.

Ready to get clarity in uncertain times?

Book a meeting with our team today and let’s walk through your numbers, risks and opportunities together — so you can move forward with confidence.

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Disclaimer  

This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.  

Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder 

Liability limited by a scheme approved under professional standards legislation.

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