# Why interest rate pain is now worse than the bad old days of 17.5%

An episode of [7am](https://invisiblenetwork.ai/podcast/1461999702), 29 Sep 2026, 16 min.

Audio: https://p.podderapp.com/2544644999/traffic.omny.fm/d/clips/2fb3740d-3436-44af-8cc0-a91900716aa5/62723a1f-3e96-4fc4-882c-b25e0181da4d/f36339f1-497b-4b9a-8a34-b4d400806348/audio.mp3?utm_source=Podcast&in_playlist=70f29d90-2a63-48aa-bf8f-b25e0181da70

For years we’ve heard from older generations that the current interest rate pain is nothing compared to the horror of 17.5 per cent rates in the late ‘80s and early ‘90s. But now, as the Reserve Bank delivers its fourth hike this year, analysis shows the pain being inflicted on homeowners is comparatively worse. So, as the official cash rate hits a 15 year high of 4.6 percent – how bad could it get? Today, KPMG senior economist Terry Rawnsley on the chance of more interest rate hikes, the flow on effects of this latest hit, and whether we should be looking at alternatives like tax hikes, to get inflation under control. If you enjoy 7am, the best way you can support us is by making a contribution at 7ampodcast.com.au/support. Socials: Stay in touch with us on Instagram Guest: KPMG senior economist Terry Rawnsley Photo: AAP Image/Sarah Wilson See omnystudio.com/listener for privacy information.

## Transcript

[0:01] Speaker 1: I'm Ruby Jones, and you're listening to 7am. For years,
[0:09] Speaker 1: we've heard from older generations that the current interest rate
[0:12] Speaker 1: pain is nothing compared to the horror of 17.5% rates
[0:17] Speaker 1: in the late 80s and early 90s. But now, as
[0:20] Speaker 1: the RBA delivers its fourth hike this year, analysis shows
[0:24] Speaker 1: the pain being inflicted on homeowners is comparatively worse. So
[0:29] Speaker 1: as the official cash rate hits a 15-year high of 4.6%,
[0:34] Speaker 1: how bad could it get? Today, KPMG senior economist Terry Rawnsley,
[0:40] Speaker 1: on the chance of more interest rate hikes, the flow-on
[0:43] Speaker 1: effects of this latest hit, and whether we should be
[0:46] Speaker 1: looking at alternatives, like tax hikes, to get inflation under control.
[0:53] Speaker 1: It's Wednesday, September 30th. Terry, this hike from the RBA
[1:02] Speaker 1: takes the official cash rate to its highest level in
[1:05] Speaker 1: 15 years. Talk me through Michelle Bullock's reasoning here.
[1:10] Speaker 2: Yeah, and Michelle kind of outlined a whole range of
[1:13] Speaker 2: reasons what's happening here. So she talked about the fuel
[1:16] Speaker 2: supply shock coming through from the conflict in the Middle East.
[1:19] Speaker 3: Disruptions to oil supply could last longer than anticipated. and
[1:23] Speaker 3: cause energy price pressures to last for longer than we
[1:25] Speaker 3: previously assumed.
[1:27] Speaker 2: She talked about AI build-outs.
[1:29] Speaker 3: The AI boom is also adding to demand in the
[1:31] Speaker 3: Australian economy at a time when we already have capacity pressures.
[1:35] Speaker 2: She talked about sort of lack of productivity in the
[1:38] Speaker 2: business sector.
[1:39] Speaker 3: The bottom line is that productivity is doing nothing. And
[1:42] Speaker 3: I know we talk about productivity a lot, but it's
[1:45] Speaker 3: so important... if we want the economy to be able
[1:48] Speaker 3: to grow and create jobs.
[1:50] Speaker 2: She talked about sort of excess demand coming through from
[1:53] Speaker 2: the economy as well. So she kind of described quite
[1:55] Speaker 2: a complex situation where there's a whole range of factors
[1:58] Speaker 2: which are sort of pushing up overall demand and sort
[2:01] Speaker 2: of pushing up inflationary pressures. And she's trying to tap
[2:04] Speaker 2: the brakes by increasing rates to kind of take some
[2:07] Speaker 2: of the heat out of the economy and reduce some
[2:09] Speaker 2: of that demand.
[2:10] Speaker 1: And at the press conference, she was asked whether the
[2:13] Speaker 1: solution has become detached from the problem in that inflation
[2:17] Speaker 1: is being driven, as you say, and as she said,
[2:20] Speaker 1: by oil prices, by the situation in the Middle East, AI,
[2:24] Speaker 1: data centre spending, but the response, it hits households who
[2:28] Speaker 1: have no control over those things. So, is that a
[2:31] Speaker 1: problem here?
[2:32] Speaker 2: Yeah, and it's probably flagging that, as the Governor said
[2:35] Speaker 2: many times, they only have one lever to pull, and
[2:37] Speaker 2: that's really interest rates. So, even though we have this
[2:40] Speaker 2: sort of complex economic patchwork of factors coming through. The
[2:44] Speaker 2: RBA can either hold rates, cut rates or increase rates. So,
[2:47] Speaker 2: they've got the one tool and today they've just pulled
[2:50] Speaker 2: the lever to increase interest rates across the whole economy.
[2:53] Speaker 1: And so, do you think it's a good decision to
[2:56] Speaker 1: raise rates right now?
[2:57] Speaker 2: Yeah, it's an unfortunate decision for all those mortgage holders
[3:00] Speaker 2: out there and businesses who will be impacted. But it's
[3:03] Speaker 2: the point the Reserve Bank Governor made was that there's
[3:05] Speaker 2: this excess demand within the economy which we're trying to
[3:08] Speaker 2: stamp out. And what we've seen over the last, you know, 18,
[3:12] Speaker 2: 24 months is that the inflation has been too high.
[3:17] Speaker 2: It's kind of been eating away into people's real wages.
[3:19] Speaker 2: The whole economy has been suffering. So, this period of
[3:22] Speaker 2: trying to increase interest rates, we're trying to stamp out
[3:25] Speaker 2: that inflationary growth. And the governor also talked about inflationary expectations.
[3:30] Speaker 2: And this is basically where If people expect inflation to
[3:33] Speaker 2: be 3% or 4% next year, they'll account for that.
[3:37] Speaker 2: They'll be expecting their local cafe to put up prices 3%
[3:40] Speaker 2: or 4%. Businesses will feel they can put up their
[3:42] Speaker 2: prices 3%, 4%, or 5%. So, you don't want to
[3:44] Speaker 2: get these expectations entrenched that everyone's like, oh, it's a
[3:48] Speaker 2: new financial year, let's increase prices 3% or 4%. We
[3:50] Speaker 2: want to try and squeeze back down on those expectations
[3:53] Speaker 2: so that people go, okay, the cost of doing business
[3:56] Speaker 2: goes up 2%, let's put up inflation by 2%.
[4:00] Speaker 1: This might not be enough to tame inflation though, right?
[4:02] Speaker 1: There's already talk of another interest rate hike soon. The
[4:06] Speaker 1: RBA says it's prepared to continue to lift rates if
[4:09] Speaker 1: it's necessary to fight inflation. So how high do you
[4:13] Speaker 1: think things could go?
[4:14] Speaker 2: The other sort of point the governor made was that
[4:16] Speaker 2: this is the fourth tapping of the brakes this year.
[4:20] Speaker 2: That whole one percentage point's worth of interest rates is
[4:22] Speaker 2: still flowing to the economy. There's people who were making
[4:25] Speaker 2: investment decisions at the end of last year are now
[4:27] Speaker 2: probably rethinking those. People might have cancelled travel plans or
[4:32] Speaker 2: eating out less. So, those previous four increases are kind
[4:35] Speaker 2: of still working their way through their economy, but the
[4:38] Speaker 2: markets are still seeing that we might see another interest
[4:40] Speaker 2: rate rise later in the year, maybe Melbourne Cup Day,
[4:44] Speaker 2: and then it's probably going to be a wait and
[4:45] Speaker 2: see to see how the rate rises during 2026 plays
[4:49] Speaker 2: out in 2027. Okay. And so, interest.
[4:52] Speaker 1: Rates are now at their highest level since 2011. What
[4:56] Speaker 1: does that actually mean for people who have a mortgage
[4:59] Speaker 1: or other debts?
[5:01] Speaker 2: What we kind of see is that people with mortgages,
[5:03] Speaker 2: they'll be paying more interest. And when we look across
[5:06] Speaker 2: the whole household sector, on average, households are spending about 6%
[5:11] Speaker 2: of their income just on household mortgage repayments. So, $ 100
[5:15] Speaker 2: of income, 6% of that is just going to interest
[5:18] Speaker 2: rate repayments. And we sort of look back over the
[5:20] Speaker 2: last 30 years, we saw a similar level sort of
[5:24] Speaker 2: in the late 1980s, when interest rates were kind of 17%,
[5:28] Speaker 2: and a lot of people of that generation will bring
[5:30] Speaker 2: up that being a very tough time. But in terms
[5:33] Speaker 2: of the amount of money going towards interest repayments, we're
[5:35] Speaker 2: kind of on par with that now. And the other
[5:37] Speaker 2: thing is that we've been at this level for probably
[5:39] Speaker 2: the last two years, whereas that late 90s was a
[5:42] Speaker 2: very short, sharp period of, you know, six, 12 months
[5:46] Speaker 2: of that level.
[5:47] Speaker 1: Yeah, let's talk about that a little more, because we
[5:49] Speaker 1: often hear from older generations that what's happening today isn't
[5:52] Speaker 1: as bad as that infamous 17.5%. interest rate in the
[5:56] Speaker 1: late 80s and early 90s. Where Westpac has taken the plunge.
[6:01] Speaker 3: Australia's biggest private bank has pushed up its home loan
[6:04] Speaker 3: mortgage rates to an all-time record high of 17%. Now
[6:08] Speaker 3: I know that's hurt many people and it's hurting people
[6:11] Speaker 3: but I think we must say to them they'll hurt
[6:13] Speaker 3: much more if Australia is ultimately forced into a recession.
[6:17] Speaker 1: So what is the comparison?
[6:18] Speaker 2: What we had back then was a 17% interest rate
[6:22] Speaker 2: but median house prices across the country were sort of
[6:25] Speaker 2: a million dollars or so. Now, we're kind of down
[6:28] Speaker 2: more about that 4.5%, 5% interest rates, but house prices
[6:32] Speaker 2: across the country are a million dollars. So, whilst those
[6:35] Speaker 2: interest rates were much higher back in the late 80s,
[6:37] Speaker 2: the size of mortgages people were carrying was much, much smaller. So,
[6:42] Speaker 2: we're basically kind of on parity. Interest rates are much lower,
[6:44] Speaker 2: but mortgages are much bigger. So, households are spending about
[6:47] Speaker 2: the same amount of their income on interest repayments.
[6:50] Speaker 1: And the figure is also averaged across all households. So
[6:54] Speaker 1: that includes people without a home loan. Home ownership is
[6:57] Speaker 1: much lower now than it was in the 90s. So
[7:00] Speaker 1: does that mean that that figure can really understate the
[7:03] Speaker 1: pressure that is being felt by households with these large mortgages?
[7:07] Speaker 2: Yeah. And so what you'll have is home ownership rates
[7:10] Speaker 2: in the late 1980s were probably about 70% of all
[7:14] Speaker 2: households were homeowners. Today, it's about 66% in terms of homeownership. So,
[7:20] Speaker 2: you've got that same burden being carried across fewer households.
[7:23] Speaker 2: And also, we know that some of those homeownership households,
[7:28] Speaker 2: they're probably that boomer generation who have paid off their mortgage. So,
[7:32] Speaker 2: we've got more of that Gen Y, the Gen Xs
[7:34] Speaker 2: who've got the big mortgages they bought in capital cities
[7:37] Speaker 2: over the last 5 or 10 or 15 years. They're
[7:40] Speaker 2: carrying the big mortgages. And the other kind of segment
[7:43] Speaker 2: is that Renters are still being bit by this as well. So,
[7:47] Speaker 2: we look at the amount of household income going to rents,
[7:50] Speaker 2: it's about 4%. And that's sort of the highest it's
[7:52] Speaker 2: been over the last five or 10 years because while
[7:55] Speaker 2: renters aren't directly paying that mortgage, their landlords are seeing
[7:59] Speaker 2: their cost of mortgages go up and they're trying to
[8:01] Speaker 2: recoup some of that in high interest rates by jacking
[8:04] Speaker 2: up the rents. So, it's not just the homeowners, but
[8:07] Speaker 2: also we've got renters are kind of being bitten at
[8:08] Speaker 2: the moment.
[8:11] Speaker 1: Still to come, could a recession be on the cards? Terry,
[8:25] Speaker 1: we know that with high interest rates comes higher unemployment.
[8:29] Speaker 1: So what kind of unemployment rate do you think we're
[8:32] Speaker 1: going to be looking at here? Because Michelle Bullock, she
[8:34] Speaker 1: has said that she doesn't want job losses. At the
[8:38] Speaker 1: same time, the RBA has said in the past that
[8:40] Speaker 1: it would like to see unemployment at 5%. Jim Chalmers,
[8:44] Speaker 1: the Treasurer, he says that's too high. What do you think?
[8:48] Speaker 2: We're thinking probably heading more towards that 4.7%. We're currently
[8:52] Speaker 2: around 4.5%, 4.6%. So, we will see a tick more up,
[8:57] Speaker 2: but there's still a lot of pent-up demand. So, the
[9:00] Speaker 2: Reserve Governor sort of mentioned job vacancies are still at
[9:03] Speaker 2: a very high level. There's a lot of businesses out
[9:05] Speaker 2: there looking to employ. So, tapping the brakes through interest
[9:09] Speaker 2: rates will sort of reduce some of that demand, but
[9:12] Speaker 2: there's still a lot of vacant jobs out there which
[9:14] Speaker 2: businesses are trying to fill, and that's across aged care, construction, engineering,
[9:20] Speaker 2: AI-related jobs. So, there's still a lot of demand in
[9:23] Speaker 2: the economy. So, we probably won't see huge job losses,
[9:26] Speaker 2: but the question is, do we land at 4.7%, 4.8%,
[9:30] Speaker 2: or 5%? And that's kind of the narrow path people
[9:34] Speaker 2: are trying to move across here with these interest rates
[9:37] Speaker 2: going up. We want to see a cooling in the
[9:39] Speaker 2: labour market. We want to see people having less money
[9:41] Speaker 2: in their pockets as more is going into The mortgages,
[9:44] Speaker 2: interest repayments, more into rent and just less discretionary spending.
[9:48] Speaker 2: So we're just trying to tap the brakes so there's
[9:50] Speaker 2: less demand in the economy without seeing big increases in unemployment.
[9:55] Speaker 1: And we've been staring down the possibility or the threat
[9:59] Speaker 1: of a recession. for a while now. What kind of
[10:02] Speaker 1: likelihood do you think there is of that?
[10:04] Speaker 2: Yeah, I think it's definitely a conversation that we're going
[10:07] Speaker 2: to be having over the next six or 12 months,
[10:09] Speaker 2: just how the economy is responding to these multiple challenges. So,
[10:12] Speaker 2: we have higher interest rates, we have consumers who might
[10:15] Speaker 2: be feeling a little less rich as house prices ease off,
[10:19] Speaker 2: Those households are also seeing the cost of living pressures
[10:22] Speaker 2: go up and up, so their spending will be crimped.
[10:25] Speaker 2: But we also have government out still spending a significant
[10:28] Speaker 2: amount of money across services, infrastructure, and that's both at
[10:31] Speaker 2: the state and federal level. You've got this big pent-up
[10:35] Speaker 2: demand that we're seeing coming through through data centres. So,
[10:38] Speaker 2: billions of dollars investment from companies who are kind of
[10:42] Speaker 2: immune effectively for interest rate rises domestically with very deep
[10:45] Speaker 2: pockets investing tens of millions, hundreds of millions in Australia
[10:49] Speaker 2: across data centres. And we've also kind of got a
[10:53] Speaker 2: housing shortage where there's a pent-up demand where housing construction
[10:57] Speaker 2: will still continue. So, there's a whole range of growth
[10:59] Speaker 2: factors across there. But regardless, we go into a technical recession,
[11:03] Speaker 2: which is two quarters of negative growth. The next sort
[11:06] Speaker 2: of six or 12 months, it's going to be a
[11:07] Speaker 2: real grind. The economy will not be growing rapidly at all.
[11:11] Speaker 1: And we all know that interest rates are this blunt
[11:14] Speaker 1: lever as a tool to bring inflation down. Do you
[11:17] Speaker 1: think that it is still the best option? Because last
[11:20] Speaker 1: month we talked with economist Saul Eslake about super as
[11:24] Speaker 1: an alternative. There are now some calls for targeted tax
[11:27] Speaker 1: rises as a way to cool demand. What do you
[11:29] Speaker 1: think of those ideas?
[11:31] Speaker 2: This is where the interest rate is kind of a
[11:33] Speaker 2: blunt tool, but it's a very quick and easy one
[11:36] Speaker 2: to bring into being. So announcement today, interest rates are
[11:40] Speaker 2: going up effectively at midnight tonight. rates will increase and
[11:44] Speaker 2: it'll flow through the financial system. If the economy was
[11:47] Speaker 2: to slow dramatically at the start of next year, very
[11:50] Speaker 2: easy to cut rates. If you're starting to talk about
[11:52] Speaker 2: like changing taxation rates or different fees and charges across
[11:56] Speaker 2: the economy, it takes it longer for those to be administered.
[11:59] Speaker 2: So that's kind of the trade-off. You have some ability
[12:02] Speaker 2: to kind of craft some very focused policies to try
[12:05] Speaker 2: and take some heat out of the economy, but that
[12:07] Speaker 2: takes time, whereas the Reserve Bank's interest rates It's a
[12:11] Speaker 2: blunt tool, but it happens pretty much instantaneously.
[12:13] Speaker 1: And just to finish on housing, does your research ultimately
[12:18] Speaker 1: suggest something bigger about Australia's housing system? Because we now
[12:23] Speaker 1: need such enormous mortgages to buy a home, and so
[12:27] Speaker 1: households have become unusually vulnerable to even relatively modest interest
[12:32] Speaker 1: rate moves.
[12:33] Speaker 2: Yeah, the Australian housing system, nothing's gone right in that
[12:36] Speaker 2: sector for probably a good 25 to 30 years. We've
[12:38] Speaker 2: had probably the taxation settings not being quite right. We've
[12:43] Speaker 2: had local planning controls blocking development in well-located areas. We've
[12:48] Speaker 2: had greenfield areas not having enough infrastructure to support bigger populations.
[12:53] Speaker 2: We've had this big demographic shift where the boomer generation
[12:56] Speaker 2: are holding onto their houses for much longer. So, not
[13:00] Speaker 2: much right has gone for the Australian housing system over
[13:02] Speaker 2: the last 25 years. And once again, there's been a
[13:05] Speaker 2: lot of good reforms over the last five or 10
[13:07] Speaker 2: years around getting more density, especially into established suburbs in
[13:10] Speaker 2: Sydney and Melbourne. But those things take two, three, four,
[13:14] Speaker 2: five years to come through. So, all these changes are
[13:17] Speaker 2: coming through, but the housing system is still in a
[13:20] Speaker 2: very tough spot and will be for a few years.
[13:23] Speaker 1: And I mean, how dismayed do you think people are
[13:24] Speaker 1: going to be by today's announcement and the prospect of
[13:27] Speaker 1: future rate rises in the context of this housing market
[13:32] Speaker 1: in which, as you say, not a lot has gone right.
[13:35] Speaker 2: Yeah, there'll be no champagne corks popped for recent home
[13:39] Speaker 2: buyers or people who've purchased over the last five-year period
[13:42] Speaker 2: who have still got big mortgages. They may not have
[13:45] Speaker 2: built up much of an offset account for them or
[13:48] Speaker 2: built up a lot of equity depending on where you've bought.
[13:51] Speaker 2: So a lot of the community is not going to
[13:52] Speaker 2: be very happy about that. We sort of looked at
[13:55] Speaker 2: some life satisfaction data from the ABS and in 2021,
[14:01] Speaker 2: During the height of the pandemic, Australians said that on average,
[14:04] Speaker 2: out of a scale of zero to 10, they were
[14:07] Speaker 2: about 7.4% was their life satisfaction. We fast forward to
[14:11] Speaker 2: sort of 2025 and they asked the same question again,
[14:14] Speaker 2: and it was 7.1%. So on average, Australian society was
[14:18] Speaker 2: feeling sadder about things last year than they were during
[14:21] Speaker 2: the pandemic. And that's because they've been sort of ground
[14:24] Speaker 2: down by two or three years of high cost of
[14:27] Speaker 2: living pressures. They've seen the mortgage go up and up.
[14:30] Speaker 2: They've seen the rent go up and up. So it's
[14:33] Speaker 2: no surprise that the average Australian household is feeling pretty
[14:36] Speaker 2: glum because it's not just been six months of sort
[14:39] Speaker 2: of challenges. It's kind of been a very challenging period
[14:42] Speaker 2: over the last three or four years. You throw in
[14:44] Speaker 2: the pandemic before that. So a lot of society has
[14:46] Speaker 2: been under a lot of stress and strain over the
[14:48] Speaker 2: past five years.
[14:52] Speaker 1: Well, Terry, thank you so much for speaking with me.
[15:08] Speaker 1: Also in the news, OpenAI has apologised for its AI
[15:12] Speaker 1: agent breaching Australian government systems and shelved the planned release
[15:16] Speaker 1: of its next chatbot model. In a blog post on Tuesday,
[15:19] Speaker 1: the company admitted it should have notified Australian authorities sooner
[15:23] Speaker 1: about a Medicare breach... in which an AI agent gained
[15:26] Speaker 1: unauthorised access to its statistics service and retrieved non-public files.
[15:31] Speaker 1: OpenAI says it was aware of the breach in August,
[15:34] Speaker 1: but only notified the Australian government a month later. It
[15:37] Speaker 1: has also stated the planned October release of its next
[15:40] Speaker 1: model has been delayed after it failed internal safety tests.
[15:44] Speaker 1: And Sarah Hansen-Young has announced she'll run to replace Larissa
[15:48] Speaker 1: Waters as leader of the Greens. Waters resigned on Monday
[15:51] Speaker 1: due to worsening kidney disease, but will remain in the
[15:54] Speaker 1: Senate after taking medical leave. The Greens are expected to
[15:58] Speaker 1: choose their new leader at a two-day party room retreat
[16:00] Speaker 1: in Sydney this week. I'm Ruby Jones. This is 7am.
[16:04] Speaker 1: Thanks for listening.

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