Most of us get this economics question wrong. We’re paying for it

July 31, 2026 — 5:00am

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It sounds a bit like an insult. But when the Reserve Bank says most Australians don’t get how interest rates work, that’s a fact.

If you think higher interest rates push prices up and worsen the cost of living, you’re in the majority. You would also be wrong (for the most part – we’ll come back to that).

It might be through no fault of your own, but the fact most Australians misunderstand how interest rates work is making the Reserve Bank’s job – and our lives – harder.

Of course, most of us understand how interest rates affect us on a purely personal level. You might have a home loan you’re trying to pay off or a savings account you’re trying to grow. Both, as you know, are affected by interest rates.

But one of the Reserve Bank’s latest pieces of research reveals most of us aren’t clued in on how interest rates affect the broader economy, or how they affect public enemy number one: inflation.

Your boss will hate this economic fix … but you’ll love it

Ross GittinsEconomics Editor

For the first time, a bunch of the bank’s economists – led by Jack Harden, Peter Rickards and Michelle Wright – took a closer look at how Australians experience and understand the economy by conducting a survey.

Their findings? They politely noted that there were “fundamental gaps in understanding of how monetary policy works, particularly in how interest rates affect inflation”.

Only one in four Australians correctly said higher interest rates would lead to lower inflation. More than half gave the wrong answer, saying higher interest rates would lead to higher inflation. And one in four were unsure.

That’s despite Australians, across all demographics, indicating that inflation – or price growth – is their single most pressing economic concern.

So, we care (a lot) about how fast prices are growing. But we’re not very good at understanding how we can slow them down.

Why does this matter? Because one of the big factors........

© The Sydney Morning Herald