Key points
  • Australia's inflation battle may have been prolonged by a reluctance to raise rates harder and earlier, economist Cameron Kusher says.
  • The cash rate has climbed to a 15-year high after inflation failed to return sustainably to the RBA's target band.
  • With inflation still above target, Kusher warns the RBA may not be finished raising rates.

The Reserve Bank's cash rate is back at its highest level since 2011, an outcome that would have surprised many economists when inflation appeared to be retreating three years ago.

Instead of moving toward rate cuts, Australia has endured four more rate hikes this year, lifting the cash rate to 4.60% as policymakers grapple with inflation that has proved far more persistent than expected. 

Read more: RBA raises cash rate to 4.60%

The reversal has reignited debate about whether the country did enough to stamp out price pressures when rates first surged after the COVID-19 pandemic. 

Speaking on the Savings Tip Jar podcast, Cameron Kusher, chief economist at Herron Todd White, said Australia is now paying the price for failing to return inflation sustainably to target when rates first began rising.

"We basically didn't do enough to contain inflation, and that has been highlighted by the fact that we've now had four interest rate increases this year," Mr Kusher said.

Australia sought to bring inflation down while preserving the unusually strong labour market that emerged after the pandemic, and unemployment remained historically low as inflation moderated.

While unemployment remained relatively low and the economy avoided recession, inflation failed to settle within the RBA's 2% to 3% target band, prompting policymakers to retighten rates. 

Inflation's decline proved temporary

Annual underlying inflation dipped below 3% in 2025, prompting three RBA rate cuts. But persistent price pressures convinced policymakers inflation was back on the rise.

Mr Kusher said that left the RBA with little option but to lift rates back up.

"Inflation did get down below 3% for a very short period of time, but it didn't get back sustainably to that 2% to 3% target range," he said.

"Now we're all wearing the cost of that because inflation basically attacks everything you buy, everything now costs more than it used to."

Australia's 'narrow path' came at a cost

Mr Kusher argues Australia took a more cautious approach than many overseas economies as central banks scrambled to contain the post-pandemic inflation surge.

The Reserve Bank repeatedly spoke of finding a "narrow path" back to price stability, seeking to cool demand without sacrificing jobs.

Mr Kusher said that strategy succeeded in keeping unemployment low, but came at a cost.

"We didn't run up our interest rates anywhere near as high as other countries did," he said.

Instead, Australia has traded a lower peak cash rate for a longer period of restrictive monetary policy, extending the pain for borrowers well beyond what many expected after the cash rate reached 4.35% in late 2023.

Housing has weakened, but the economy has not

Despite clear signs the housing market is losing momentum, Mr Kusher questioned whether the downturn is having the broader economic impact the RBA fears.

Home prices have retreated from their peaks, borrowing capacity has been squeezed by higher interest rates and mortgage lending has slowed. Yet the wider economy has proved more resilient than many expected.

"We know that the housing market's weakened, but there's nothing in the data saying that that's actually spilling across to the broader economy," he said.

His comments came after Governor Michele Bullock indicated housing conditions were among the factors considered in the decision to leave rates unchanged.

But Mr Kusher argued the Reserve Bank's focus remains misplaced while inflation is still above target and economic growth has proven more resilient than many forecasters expected.

"It's clear that housing is not yet having a broader impact on the economy and fighting inflation should be the number one priority," he said.

Will rates need to go higher?

Despite the increasingly restrictive rate environment, Mr Kusher does not expect Australia to fall into recession.

Instead, he anticipates slower economic growth, rising unemployment and softer consumer spending as higher borrowing costs continue to work through the economy.

"My base case is certainly not that we're going to go into a recession, but I would fully expect that economic growth slows, we continue to see the unemployment rate drift higher and hopefully, households and businesses do start to curtail their spending," he said.

For borrowers, the more pressing question is whether the current cycle has reached its peak.

Mr Kusher said another increase at the RBA's November meeting remains "more likely than not", although he acknowledged upcoming inflation and labour market data would ultimately determine the board's next move.

The major banks are now evenly divided over whether the Reserve Bank will lift rates again in November, with Westpac and ANZ forecasting another 25-basis-point increase while CBA and NAB expect the central bank to remain on hold.