Could the RBA’s rate rise send Australia into recession?

Summary

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7am Podcast Summary

Episode: Could the RBA’s rate rise send Australia into recession?
Date: May 5, 2026
Host: Daniel James (Solstice Media)
Guest: Dr. Richard Dennis, Co-CEO of The Australia Institute

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Episode Overview

This episode of 7am explores the Reserve Bank of Australia’s (RBA) latest interest rate hike—raising the cash rate to 4.35%—and unpacks its potential to tip Australia into recession amidst a cost-of-living crisis. Host Daniel James is joined by economist Dr. Richard Dennis to dissect the RBA’s motivations, the global economic forces at play, and the real-world effects on Australians already struggling with higher prices and mortgage repayments.

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Key Discussion Points & Insights

1. The RBA’s Third Consecutive Rate Hike

• Announcement & Context:
  • The RBA raised rates to 4.35%, its third hike in a row. The decision comes as Australians face surging fuel costs and increasing household financial pressures.
  • Daniel James frames the move as a further blow to mortgage holders, noting broader inflationary pressures exacerbated by the conflict in the Middle East and spiking oil prices.
  • Economists are dubbing this the “Hormuz hike,” linking it directly to geopolitical shocks (01:13–01:30).

2. The Rationale (or Lack Thereof) Behind the Rate Hike

• Dr. Dennis Critiques the Decision:
  • Calls the rate rise "a brutal decision" and “unnecessary and incorrect,” pointing, ironically, to the RBA Governor’s own admission that the hikes “will have no impact on inflation for the next six months.” (01:41–02:10)
  • Notable quote:
    • “One thing I agree with the RBA governor about is that this decision to increase interest rates will have no impact on inflation for the next six months. Like I'm not verbaling her. That's literally what she said.” — Dr. Richard Dennis (01:41)
• Inflation Drivers Identified:
  • Dr. Dennis argues that external factors—namely Donald Trump’s war in the Middle East and the resulting spike in world energy prices—are the primary causes of inflation, not domestic demand.
  • The RBA, he asserts, knows that domestic interest rate rises “will do nothing to lower the world price of oil,” yet acts anyway due to concerns about "inflationary expectations." (02:10–02:51)
• Critique of RBA’s Mandate:
  • The bank officially targets 2.5% inflation, but Dr. Dennis highlights the RBA’s foundational law, which also requires "full employment"—a mandate he says is overlooked in practice.
  • Notable quote:
    • “To a man with a hammer, the world is a nail. And to an RBA with one interest rate lever to pull, that's what they pull now.” — Dr. Richard Dennis (02:59)

3. Understanding “Inflationary Expectations”

• Explanation of Economic Jargon:
  • Dr. Dennis demystifies the term, arguing its impact is more psychological than immediate, and challenges whether expectations are genuinely rising:
    • “Inflationary expectations is this kind of bit of psychobabble, really? … Are the people thinking inflation will go up a lot? Now again, the RBA governors just said, look, there's no signs that inflationary expectations are rising at the moment, comma, but they might, let's get ahead of it.” (04:33–05:49)
• Getting Ahead of Expectations:
  • Dr. Dennis likens the RBA’s preventative measures to amputating a limb out of fear:
    • Notable quote:
      • “It's chopping off someone's leg because you fear they might get gangrene in their toe one day.” — Dr. Richard Dennis (05:59)
  • He maintains the RBA is inflicting pain—higher rates and possible unemployment—on households with little evidence of future runaway inflation.

4. The Danger of Overcorrection: Is Recession Likely?

• Rapid Policy Reversals Highlight Forecasting Failures:
  • Three rate cuts followed by three rapid hikes mark the fastest switch in 15 years. Dr. Dennis argues this exposes the RBA’s lack of forecasting skill (07:31).
  • Notable quote:
    • “We know they were bad at forecasting a few years back, we know they were bad at forecasting a year ago. … I also know no one at the RBA does either.” — Dr. Richard Dennis (07:31)
• Risks to Australians:
  • Unemployment and even recession are real risks, with Dr. Dennis warning policy mistakes could reproduce a 1990s-style downturn:
    • “The recession we had to have in the early 90s was literally caused by the Reserve bank jacking up interest rates to fend off its fear of inflation.” (09:57)
  • The pain of these decisions is disproportionately borne by mortgage-holders and low-to-middle income Australians.

5. Global Context: Why Is Australia Out of Step?

• International Comparisons:
  • Unlike Australia, the US Fed, Bank of England, and others (Japan, Europe, Canada) are holding rates steady despite also feeling the oil shock.
  • Dr. Dennis suggests the RBA is risk-averse about being “out of touch,” following financial sector sentiment too closely.
    • “They're taking a lot more risk and we're load[ing] up a lot more pain on low and middle income earners than people in other countries are.” (08:53)

6. Fiscal Policy Tensions: The Treasurer’s Dilemma

• Difficult Position for Jim Chalmers:
  • The RBA Governor is vocal that the government could help by being less generous to households (i.e. tightening fiscal policy).
  • Notable quote:
    • “She's literally saying, hey, government, if you could kind of increase taxes on poor people and don't give any public servants a pay rise, you could add some fiscal policy misery to the monetary policy, the interest rate misery I'm dishing out.” — Dr. Richard Dennis (11:24)

7. Will There Be More Rate Hikes?

• Outlook Uncertain:
  • Dr. Dennis says further hikes can't be ruled out, especially given unstable global conditions and the RBA's unpredictable actions:
    • “I'd be very surprised if she ruled out increasing interest rates again because…that excessive confidence of what the RBA will and won't do is exactly what got Philip Lowe into trouble.” (13:09–14:14)

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Notable Quotes & Memorable Moments

• On the pointlessness of the rate rise:
  • “Increasing people's mortgage interest rates will do nothing to lower the world price of oil. But they've decided that they better increase interest rates anyway because they don't want what they call inflationary expectations to speed up.” — Dr. Richard Dennis (02:10)
• On the risks for ordinary Australians:
  • “What's really hard on the poor is a recession. And there's no doubt that increasing interest rates in a slowing economy…we are getting very close to policy induced recession and that's the risk that she's comfortable to take.” — Dr. Richard Dennis (06:28)
• On the RBA’s repeated forecasting errors:
  • “The problem is that they're willing to put all of the risk, all of the risk on driving up unemployment while real wages fall. And, you know, they're insulated from the consequences of these enormous choices that they're making.” — Dr. Richard Dennis (07:31)
• On demands for government to join in the pain:
  • “If you took a stick to them as well, we could be double safe, triple safe, whatever.” — Dr. Richard Dennis (12:19)

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Key Timestamps for Important Segments

• 01:13–01:30: Daniel James outlines the “Hormuz hike” and the impact of Middle East conflict on inflation.
• 01:41–02:10: Dr. Dennis declares the rate rise “unnecessary and incorrect.”
• 04:33–05:49: Dr. Dennis unpacks the concept of inflationary expectations.
• 05:59: Dr. Dennis’s metaphor: “chopping off someone's leg because you fear they might get gangrene in their toe one day.”
• 07:31: Discussion on RBA’s forecasting failures.
• 08:53: Why Australia stands apart from the US, UK, Europe, and Japan in monetary policy.
• 09:57: Dr. Dennis warns of recession risks.
• 11:24: Fiscal policy interplay; Dr. Dennis critiques RBA’s prompts to the Treasurer.
• 13:09–14:14: Ongoing uncertainty—could there be further rate rises?

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Tone & Language

The tone is critical, direct, and sometimes wry, especially from Dr. Dennis, who repeatedly questions the logic, motivation, and social impact of the RBA’s decisions. Daniel James maintains a neutral, inquisitive stance, providing accessible explanations for a general audience and highlighting the human consequences of high-level economic decisions.

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Summary Takeaway

The episode delivers a sobering analysis of Australia’s economic crossroads. The RBA’s latest rate hike, justified by fears of rising inflation expectations rather than present realities, risks driving the country into recession, with little chance of addressing core inflation drivers—global oil prices and geopolitical tensions. Dr. Dennis argues that the brunt of the policy is borne by ordinary Australians, especially mortgage-holders and lower-income earners, while the RBA acts from behind a “wall of insulation.” Meanwhile, the government faces its own dilemma—whether to offset or amplify this pain as the economy teeters and politics loom large.

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For listeners seeking clarity on why rates keep rising, who is getting hurt, and whether there’s an end in sight, this episode offers a candid, critical, and accessible breakdown of one of Australia’s most pressing economic challenges.

Transcript

[Daniel James]

Now, I understand this is a really difficult time for households who are already facing higher fuel prices and other cost of living pressures. But we must get on top of inflation now so that it doesn't get away from us.

The Reserve bank has raised interest rates again. The cash rate is now 4.35% after the third rate hike in a row.

Developments in the Middle east remain highly uncertain, but under a wide range of possible scenarios, the conflict adds to global and domestic inflation.

For Australians, already stretched by the cost of living, it means another hit to mortgage repayments, rents and household budgets. And while the decision was widely expected, the reason behind it is more complicated. Some economists are calling it the Hormuz hike, a response to global oil prices, the war in Iran and fears inflation could skyrocket.

Australians are poorer because of this shock. We are poorer and there is no way out of that.

I'm Daniel James and you're listening to 7am today, economist and co CEO of the Australia Institute, Dr. Richard Dennis on why the Reserve bank is making Australians pay more to contain inflation and the risk that it goes too far. It's Wednesday, May 6th. Richard, thanks for joining us again. This is a brutal decision for Australians already struggling in a cost of living crisis and strug under the weight of the last two interest rate hikes. What was the RBA's reasoning for this decision?

[Dr. Richard Dennis]

Oh, look, it was a brutal decision. I think it was an unnecessary and incorrect decision. And you know, one thing I agree with the RBA governor about is that this decision to increase interest rates will have no impact on inflation for the next six months. Like I'm not verbaling her. That's literally what she said.

[Daniel James]

These interest rate rises are not going to do anything for inflation the next six months. That's done and dusted. We know that those prices are coming through.

[Dr. Richard Dennis]

Obviously inflation at the moment is being caused by Donald Trump unilaterally starting a war in the Middle east and driving up world energy prices. The RBA are not stupid. They know that increasing people's mortgage interest rates will do nothing to lower the world price of oil. But they've decided that they better increase interest rates anyway because they don't want what they call inflationary expectations to speed up. So yeah, I agree with the RBA Governor. This won't help for the next six months. But she's actually saying, but if I dish out enough pain now, it might come in handy in six months time. And it can't hurt, she says, having just heard us.

[Daniel James]

So why has she done it? What reasoning can you I guess backward engineer in terms of why this decision's been made.

[Dr. Richard Dennis]

Well, firstly, because the Reserve bank has what it thinks is one job. Its one job is to target inflation of 2.5%. We used to say 2 to 3%, but we had a review into the RBA and they were like, no, no, we should aim for the middle of the range. So they've got this very precise target now for inflation. They want it to be 2.5% and they've got one lever to pull, really, interest rates. So, you know, to a man with a hammer, the world is a nail. And to an RBA with one interest rate lever to pull, that's what they pull now. You know what's interesting is the RBA act, the act of Parliament that establishes the RBA says full employment should be its goal. Like, I'm not making this up, it's hidden on this top secret thing called the Internet. It's written into the founding legislation of the Reserve bank of Australia and full employment is in there as one of the goals. But everyone knows, and I've got scare quotes going for nose that actually, while the act might say full employment, what they know is that 2.5% inflation is the real goal.

[Daniel James]

After the last interest rate hike, Michelle Bullock spent a lot of time talking about inflation expectations drifting up, and she spoke about it again at her press conference.

We've already seen expectations for inflation over the next year or so increase, and we need to ensure that this does not lead to higher inflation expectations over the longer term.

Can you explain why that's a problem when it comes to inflation?

[Dr. Richard Dennis]

Yeah. So inflationary expectations is a sort of fancy word economists use to describe what people think might happen, you know, in the future. So let's say you and I were signing a contract for my wage or your wage, or, I don't know, the price of beans. If you and I both thought that the price of everything was going to rise 10% in the next year, well, one of us would be pretty dumb to sign a contract today that didn't anticipate what's going to happen. Right? So if I think that prices of rent are going to go up, if I think prices of labour are going to go up, I think prices of beans are going to go up. Well, if, if I have to write a contract today about what price, I'll sell you some beans in a year, I'm gonna price in today all the things I expect to happen. So inflationary expectations is this kind of bit of psychobabble, really? It's you know, I wonder what the people are thinking. Are the people thinking inflation will go up a lot now again, the RBA governors just said, look, there's no signs that inflationary expectations are rising at the moment, comma, but they might, let's get ahead of it.

[Daniel James]

Yeah, that's what I found quite confusing. As a bit of a punter here, Richard, what does getting ahead of it mean in terms of expectations?

[Dr. Richard Dennis]

It's chopping off someone's leg because you fear they might get gangrene in their toe one day. It's, you know, like being, you know. No, because again, all the RBA is worried about is inflation being above 2.5%. They are terrified of being above this range. So even though we know the inflation's going up because of something external, beyond our control, even though we see no signs of workers and households and employers expecting it to last forever, even though we know that, why don't we whack it with a hammer, just in case, just for good measure. But again, who bears the risks of that? Who bears the costs of that? Well, people with mortgages. And Michelle Bullock just said, oh, you know, inflation is really hard on the poor. Well, you know what's really, really hard on the poor? Unemployment. What's really hard on the poor is a recession. And there's no doubt that increasing interest rates in a slowing economy. You know, we are getting very close to policy induced recession and that's the risk that she's comfortable to take.

[Daniel James]

Coming up, could the rate hike send Australia into recession? Richard, in the last year we've had three rate cuts and now three rate hikes, which is the fastest RBA easing to tightening in 15 years. What do we read into that?

[Dr. Richard Dennis]

They're not very good at forecasting. And we know they're not very good for forecasting because remember they said, you know, under the previous governor, oh, we won't be increasing interest rates for years. So people went out and borrowed a lot of money because the RBA governor forecast that the RBA wouldn't increase interest rates before they increased them, you know, a dozen times in a row. So we know they were bad at forecasting a few years back, we know they were bad at forecasting a year ago. Now, to be clear, I don't have a crystal ball. I don't know exactly what's going to happen to the world economy in 12 months time, but I also know no one at the RBA does either. Right. And the fact that things are unknowable doesn't mean that we still don't have to make hard decisions today about what would be better or what would be worse. The problem's not that the RBA doesn't know, because frankly, no one does. The problem is that they're willing to put all of the risk, all of the risk on driving up unemployment while real wages fall. And, you know, they're insulated from the consequences of these enormous choices that they're making.

[Daniel James]

If we look at the cash rate seen globally, I mean, Australia is the outlier here. Last week, the U.S. federal Reserve and the bank of England both held rates. Canada, Japan and the European Union are also going for a more of a wait and see approach. They're feeling the global oil crunch too. So why, why are we different?

[Dr. Richard Dennis]

Good question. You know, I don't think there's a good answer, but we are different. We're taking a lot more risk and we're load up a lot more pain on low and middle income earners than people in other countries are. I think that part of it is that the RBA has got it wrong for so long that the thing they really kind of are worried about now is not being wrong. They're kind of afraid of being out of touch. So when all these kind of, you know, bank analysts say we expect them to cut rates or we expect them to increase rates, I think the RBA is listening to the cheer squad or the commentators way too loud. I think they're uncertain what's going to happen, but they would rather be kind of doing what all the finance sector's telling them they should do. Because at least then if they're wrong, they're wrong in what they think is good company. Whereas I think their job's to be right on our behalf.

[Daniel James]

What's the danger here to Australians and to the economy if the RBA goes too hard?

[Dr. Richard Dennis]

Recession, you know, the recession we had to have in the early 90s was literally caused by the Reserve bank jacking up interest rates to fend off its fear of inflation. These are very, very real risks. And again, I'm comfortable with people saying they don't know what's going on. I'll put my hand up and say, I don't know what Trump's going to do, I don't know how long the war's going to do go. But I agree with Michelle Bullock. Increasing interest rates will not lower prices in Australia. Right when prices are going up because, you know, petrol and diesel are going up, increasing interest rates will do nothing to fix that. So for me, as an economist, as a person with a Mortgage. And as someone who cares about the country I live in, I just think that this is a bad decision that loads up a lot of pain and a lot of risk on some people, while actually increasing the interest rate that people with a million bucks or 2 million bucks in super are going to receive. We recognise that even though the budget is not the primary driver of prices in our economy or these interest rate decisions, we intend to play a helpful role, not a harmful role in the fight against inflation.

[Daniel James]

So what impact will this decision have on Netflix budget? It must be. It's a very difficult time for our treasurer, Jim Chalmers. Does this make his job even more difficult?

[Dr. Richard Dennis]

Yes, it does. Particularly because the RBA governor's rhetoric is basically saying that her job would be easier if Jim Chalmers was nasty to people too. Right. So she's literally saying, hey, government, if you could kind of increase taxes on poor people and don't give any public servants a pay rise, you could add some fiscal policy misery to the monetary policy, the interest rate misery I'm dishing out. And if you would do that, Treasurer, that would make my job as governor of the RBA easier.

[Daniel James]

All I'm saying is that the extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand.

[Dr. Richard Dennis]

So she's not blaming Jim Chalmers for inflation because he didn't cause it, because Donald Trump caused it. But what she is saying is, hey, I'm taking a stick to ordinary Australians. If you took a stick to them as well, we could be double safe, triple safe, whatever. So I do think it makes life harder for the Albanese government that is under pressure to fix people's problems. It is under pressure to help people out during a cost of living crisis that Donald Trump caused.

[Daniel James]

Finally, is this it now or can we expect to see more hikes? Given the instability of the Iran situation, the long rebound time that is expected even when the war and the oil shock does come to an end, Is this it or can we expect more?

[Dr. Richard Dennis]

Well, we can't rule out more because even when there's no signs of rising inflationary expectations, and even though the governor says we don't need to increase them, she's increasing them. So of course they could increase them again in the future. Who knows how long Donald Trump's war is going to last and who knows how the private sector will respond to it because, well, we're not supposed to talk about power and profits in Australia if, if companies respond to these price shocks by increasing prices and protecting themselves from any pain at all? Well, the RBA might turn around in three or six months and say, oh, look, you know, inflation didn't fall as fast as we thought. I guess we're going to have to hit people with mortgages again. I'd be very surprised if she ruled out increasing interest rates again because you know, that excessive confidence of what the RBA will and won't do is exactly what got Philip Lowe into trouble.

[Daniel James]

What a time to be alive. Richard Dennis, thank you for your time.

[Dr. Richard Dennis]

Thank you.

[Daniel James]

Also in the news, Pauline Hanson says she may step down from the Senate and run for the House of Representatives at the next election.

It is under consideration. No decisions have been made. We're still two years outside the election, so it is under consideration. The mood of ours, you know, we're rising the polls. It's something that needs to be taken. Serration.

It comes after reports of infighting inside one nation after the party's candidate for this weekend's Farah by election was revealed to have sought labor pre selection in the recent past. And the PM has left the door open for a one off tax break for workers in next week's budget. It's been reported that the government is working on a tax cut of between 200 and $300 for every Australian that pays tax. Anthony Albanese wouldn't rule out the move at a press conference yesterday, but said we'd have to wait until budget night to find out. I'm Daniel James. Thanks so much for listening to 7am we'll be back tomorrow.