Inflation and Interest Rates

Inflation is simply the increase in the price of everyday goods and services. When inflation is high, groceries, fuel, power, rent and other essentials become more expensive, and households feel their budgets being stretched.

To slow this rise in prices, the Reserve Bank increases interest rates. Higher interest rates make borrowing more expensive and encourage people to spend a little less and save a little more. When overall spending in the economy cools, demand for goods and services eases, which helps take pressure off prices and gradually brings inflation down.

This creates a balancing act. On one hand, higher interest rates increase the cost of servicing debt, such as home loans and personal loans. On the other hand, they are designed to slow inflation and, over time, help stabilise or reduce the growth in everyday living costs.

In simple terms, a rate rise is meant to shift some pressure from the cost of living to the cost of borrowing, with the goal of restoring balance. While households may feel higher loan repayments in the short term, the long-term aim is to stop prices from rising too quickly and protect the overall purchasing power of income.

So, interest rate increases are not designed to make life harder, but to create a healthier balance between what people pay on their debts and what they pay for everyday essentials, helping to keep the economy and household budgets on a more stable path.