A fifth interest rate hike by the Reserve Bank of Australia next week is now seen as likely by financial markets.

Whether the rate rise happens then, or at a future meeting, most of the media focus will be on the higher cost of mortgages.

But that’s just one of the ways higher rates dampen demand across the economy and help bring down inflation. Let’s look at some of those other avenues.

Why is the RBA raising rates?

Inflation has been stubbornly above the RBA’s target range of 2-3% for most of the past five years.

Data this week showed annual inflation has continued to rise, up to 4.3% in September from 4.0% in August. While the RBA’s favoured measure of underlying inflation was 3.7% in the September quarter, this, too, remains well above the central bank’s target.

Read more: Inflation jumps to 4.3%, adding to pressure for RBA rate rise next week

RBA officials have been increasingly vocal about the need to bring down inflation. Deputy Governor Andrew Hauser warned recently that “the inflation outlook looks materially worse than we projected in the August report”.

Hauser was also worried that an increasing share of businesses are losing confidence in the central bank’s commitment to the inflation target. He called it the “central banker’s nightmare”.

Another RBA official, Assistant Governor Sarah Hunter, even went on 60 Minutes to explain the bank’s approach. She emphasised: “higher interest rates will work.”

Raising interest rates to slow the economy is how the RBA lowers inflation. Yet many people — perhaps a majority — are sceptical about this.

But it is true nonetheless.

Read more: Over half of Australians surveyed don’t know how the RBA is fighting inflation – making it harder to beat

How does........

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