Australian banks announced big profits over the past several weeks, and have been roundly criticised by many believing the fees charged (including interest rates) are excessive. What is not well known is that banks have passed on only 2.73% of the RBA’s (Reserve Bank of Australia) 4.00% rate increases since early 2022 as at June 2023. This has actually been a cushioning effect for borrowers.

Banks have been competing aggressively and on average have not passed 0.63% of the 4.00% of RBA increases on to their variable-rate loan customers. That means variable rate borrowers have avoided the pain of slightly more than two RBA rate rises. Economic theory (and historical practice) suggests the RBA should have compensated for this by delivering extra rate increases, but appears to have turned coy, having weathered enormous criticism for increases to official rates over the course of 2022 and 2023. We estimate the result of this will be these current levels of interest rates for longer (see below).

Of course, a large group of fixed-rate borrowers during the pandemic, which accounted for almost 40 per cent of all loans outstanding, avoided any of these increases. That is until they roll over to new variable rate products at the fixed-rate loans’ expiry. This is going to be a shock for many.

Investment manager Coolabah Capital “estimate that across all variable and fixed-rate loans, borrowers have missed around 127 basis points (i.e. 1.27%) of the first 400 basis points of RBA increases (the equivalent of more than 5 standard RBA rate increases of 25 basis points each).”

As stated above, this is a major reason why the policy of interest rate rises (known as a ‘tightening cycle’) is likely to be longer than it might normally be to get inflation back to the RBA’s 2.5 per cent target.

(Note that the RBA’s own outlook forecasts that it will not hit its 2.5 per cent inflation target until 2026 which means rates to stay at least at current levels until then.)

Other contributors to elevated interest rates

Another effect upon elevated interest rates is the large cash buffers Australian households built-up during the pandemic. The US Federal Reserve estimates Australia’s savings were among the highest in the developed world (behind only Singapore), estimated at over 20 per cent of annual household income.

Households are spending these excess cash reserves thereby creating additional demand and inflation. This means monetary policy has to work harder to have its desired impact. Estimates state US households will exhaust their excess buffers later this year. However, Australian households will be able to draw on their additional savings until late 2024, creating a further challenge for the RBA and likely sustained interest rates.


Wage rate demands promoted by union and other employee groups have had a similarly impactful effect. The arguments for wage increases include the higher cost of living experienced by consumers and that wages haven’t meaningfully increased for a long time. Whilst these points may be correct, the result is if more money is placed in the hands of consumers, it will be spent thus creating more demand for goods and services. Thes result is stubbornly high inflation, for longer.

Naturally, the corrective tool employed by the RBA is, you guessed it, interest rates.