In 8 months the Reserve Bank raised the cash rate from 0.1% to 3.1% in an effort to slow inflation growth which has been increasing around the world. But while many things in the economy remain affected by the pandemic and its ructions, the impact of interest rate rises remains the same.

As policy director, Greg Jericho notes in his column in Guardian Australia, the latest lending data reveals that home loan numbers have fallen by 25% over the past year. The cost of repaying an average new mortgage in Sydney or $750,000 has increased by more than third and as a result fewer people are taking out loans and house prices are falling.

This fall in the price of the item most directly affected by interest rates however is not reflected in the official CPI figures. Rather than measure house prices, the CPI measures the cost of “new dwelling purchases by owner-occupiers”. This is actually the cost of building a new home. In the year to September 2022 (the most recent CPI figures) this item accounted for a quarter of the total growth of inflation. And yet while “new dwelling purchases” rose by 21% the price of dwellings across Australia rose by just 1%.

This means that inflation is not truly reflecting the impact of interest rates. Rising interest rates do slow the economy, they do reduce the level of money available to mortgage holders to spend on other item and thus reduce demand. That the official CPI figures are not fully showing this does not mean the Reserve Bank needs to keep raising rates.

The Reserve Bank has already raised rates at a historically fast pace. They have slammed on the brakes as hard as they have at any time in the past 30 years. Given economists around the world are predicting a slowdown in the global economy and here in Australia, the RBA needs to pause its rate rises and not keep hitting the brakes on an already slowing economy.