If the Reserve Bank of Australia (RBA) raises interest rates today, it signals their view that inflation remains a more significant concern than sluggish economic growth and the potential risk of a recession.

This is the crux of the matter, cutting through any political chatter.

When the RBA decides to increase rates, it is because they see inflation as stubbornly persistent, and they believe that allowing prices to rise unchecked poses a greater threat than the negative impact of another rate hike on already underperforming economic growth.

Homeowners with mortgages and business owners are concerned that a rate increase will not only elevate their repayment costs but could also slow down the economy, depreciating asset values and heightening the risk of job losses.

Currently, Australia’s cash rate stands at 3.85 percent, following an increase by the RBA in February.

Politically, it’s crucial to understand that inflation was already an issue before the conflict in Iran. The recent unrest in the Middle East didn’t create Australia’s inflation woes out of nowhere; it has merely exacerbated an already existing problem.

Australians endured a dozen rate hikes in the aftermath of the change of government election back in 2022. The respite was brief and minimal, and didn’t come close to undoing the post -pandemic increases.

Now we’re left to contend with a new wave of inflation, initially sparked by too much public and private spending – and added to by events overseas beyond our control.

If rates go up today, it will be because the RBA believes inflation still poses a bigger threat than slower growth and the risk of a recession (pictured, RBA Governor Michele Bullock)

Inflation was a problem before the Iran conflict began (pictured, smoke in Tehran on Monday)

When rates rise in a country that keeps being told the economy is resilient, what people hear is something much simpler: resilient for whom? This is where the politics gets ugly.

Labor has spent a long time trying to tell voters that inflation was heading the right way, the worst was behind us and the government was helping slay the inflation beast.

Treasurer Jim Chalmers, in particular, has loved that language. The inflation dragon, as he called it.

Slaying it, Chalmers implied, was part of his great political and economic mission. He even posed next to artwork of a slain dragon in a glossy feature about powerful and influential Australians, puffing up his own importance.

If rates go up today, the dragon is certainly not slain. It’s still breathing fire into mortgage repayments, grocery bills and business costs. And every family feeling the squeeze will know about it.

Governments don’t formally set interest rates, but they usually wear the consequences of them. 

No one sitting at the kitchen table trying to work out how to pay the mortgage and the power bill gives a toss about the institutional niceties of central bank independence.

They look at the government of the day and ask the obvious question: you said inflation was being beaten, so why am I getting hit again?

Treasurer Jim Chalmers might not set the cash rate, he has controlled government spending, too much of which has contributed to rising inflation

When politicians try to take credit for the good times, they must also accept criticism for the bad.

And while Chalmers might not set the cash rate, he has controlled government spending, too much of which has contributed to rising inflation.

Had Labor been more restrained, had it spoken more soberly about inflation being moderated but not defeated, this moment would still hurt but it wouldn’t look so politically self-inflicted.

Inflation isn’t something you slay with a media strategy. It’s not conquered with symbolism, self-congratulation or feature spreads presenting the Treasurer as some kind of economic warrior king.

It comes down when demand cools, supply constraints ease, expectations remain anchored and policy settings stop making the problem worse with over-spending by government.

The opposition will naturally try to pin any rate rise squarely on Labor, and some of that will be crude opportunism. But Labor has given its critics ammunition.

The deeper problem for the government is that this is happening in the middle of an already raw cost of living crisis. Voters are in no mood for nuance. 

They are tired, poorer in real terms than they expected to be, and they are increasingly cynical about politicians claiming success while ordinary living standards remain under pressure.

A rate rise today would reinforce this cynicism.