Tomorrow we’ll get the latest figures on inflation in Australia. That data will be critical in helping the Reserve Bank of Australia decide whether to lift interest rates again next month.

Answering questions at a lunchtime speech today, RBA Governor Michele Bullock noted “inflation is still too high”.

Yet many Australians are confused about how monetary policy – the RBA’s setting of interest rates – actually works, according to a new RBA survey.

This surprising finding means the central bank has more work to do in explaining why it has raised interest rates three times this year, and may hike them again on August 11 or later this year.

Only 25% of respondents in the survey correctly answered that higher interest rates would lower inflation. There were other misconceptions, as well, including a belief by a significant minority that the RBA sets tax rates. (Spoiler: that is the government’s job.)

So let’s unpack how interest rates actually work. And at the end of the article, you can take the RBA’s quiz and see how well you understand the economy.

Inflation is the top concern

The RBA survey of 9,000 Australians over 2025 and 2026 found that inflation was by far the biggest economic concern.

About two-thirds of people ranked it among their top three concerns. Inflation was the top........

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