Governor Michele Bullock says RBA research identifies the exchange rate, not household mortgages, as the most important channel through which interest rate changes reach the economy and inflation.

Picture the familiar image of an interest rate rise: a household budget spread across a kitchen table, a mortgage statement, a calculator. In Australia, where many home loans are on variable rates, the link between the cash rate and household cash flow is so direct that it tends to dominate the conversation.

So it was striking when Reserve Bank of Australia Governor Michele Bullock, speaking at her media conference on 29 September 2026, pointed somewhere else. On how monetary policy transmits to the economy, she said: "according to our research, in fact, the most important channel is the exchange rate channel".

The remark came on the day the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60%. It is a reminder that rate decisions ripple through the economy by several routes – and that the one households feel most keenly is not necessarily the one doing the most work on inflation.

The channels of monetary policy

Economists generally describe several ways a change in the cash rate affects spending and prices. In textbook terms, they include:

  • The cash-flow channel: higher rates increase repayments for borrowers with variable-rate loans, leaving less to spend, while savers earn more on deposits.
  • The savings and investment channel: higher rates make saving more attractive and borrowing to spend or invest less attractive.
  • The asset price and wealth channel: higher rates can weigh on the value of housing and other assets, making owners feel less wealthy and more cautious.
  • The exchange rate channel: changes in interest rates relative to other countries can influence the value of the Australian dollar, affecting the prices of imports and the competitiveness of exports.

These channels operate together, and their relative strength can vary over time. The Governor's comment suggests that, on the RBA's research, the exchange rate route carries the greatest weight.

How the exchange rate channel works

The mechanics are straightforward in principle. If Australian interest rates rise relative to those overseas, holding Australian dollar assets can become more attractive to investors, all else being equal. That can support demand for the currency and push its value higher than it otherwise would be.

A stronger dollar then affects inflation in two ways.

The direct effect is on import prices. Australia buys a wide range of goods from overseas – from fuel to electronics to machinery – and a stronger currency means each Australian dollar buys more. That can lower the local-currency price of imported goods, feeding relatively quickly into consumer prices.

The indirect effect works through demand. A stronger dollar makes Australian exports more expensive for overseas buyers and makes imports more competitive against locally produced goods. That can reduce demand for domestic output, easing pressure on the economy's capacity.

The important words, however, are "all else being equal". Exchange rates are influenced by many forces beyond domestic interest rates, including rates set by other central banks, commodity prices, global risk appetite and geopolitical events. A rate rise does not guarantee a stronger currency; it only means the currency is likely to be higher than it would otherwise have been.

Where the dollar sits now

The RBA publishes daily exchange rate data. At 4:00 pm on 29 September 2026 – the day of the decision – the Australian dollar was worth 0.6987 US dollars, or 69.87 US cents. The trade-weighted index (TWI) stood at 64.8.

The TWI is a broader measure than the US-dollar rate. It tracks the Australian dollar against a basket of currencies of Australia's trading partners, weighted by the importance of each in Australia's trade. Because Australia buys from and sells to many countries, the TWI offers a more complete picture of how the currency affects import prices and export competitiveness than any single bilateral rate.

These are single-day readings, and it is too early to draw conclusions about how the currency will respond over time.

Why this matters right now

The exchange rate channel is especially relevant given the forces the Board identified in its statement. Many of the price pressures it cited originate overseas and are typically priced in foreign currencies:

  • "global oil supply disruptions are maintaining upward pressure"
  • "global energy prices now much higher" than at the time of the August forecasts
  • "AI-related demand is driving rapid growth in global prices for technology-related goods"

When global prices for energy and technology rise, the value of the Australian dollar influences how much of that increase lands in local prices. A stronger currency can cushion the impact; a weaker one can amplify it. That makes the currency a key variable for an economy where the Board says "inflation remains elevated".

Headline inflation was 4.0% over the year to August on the monthly CPI indicator, and the Governor said underlying inflation has "been about 3.5 per cent for the past six months" – both above the 2–3% target.

None of this means mortgages do not matter. The Governor said scheduled mortgage payments are "back up sort of around 10 per cent" of household disposable income, and acknowledged: "I know this decision is difficult for households with a mortgage and businesses." The cash-flow channel is real. The RBA's research simply suggests it is not the largest.

Questions worth considering for those following the outlook include:

  • How is the Australian dollar moving relative to both the US dollar and the broader TWI?
  • How are other central banks' decisions affecting the interest rate gap with Australia?
  • Are import-heavy categories in the 28 October CPI release showing signs of easing or further pressure?

The bottom line

The popular view of rate rises focuses on mortgage repayments, but the RBA's research points to the exchange rate as the most important transmission channel. By influencing the dollar, interest rates can affect the local price of imported goods – a significant consideration when global energy and technology prices are rising. With the Board saying it "will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed", the currency is likely to remain a central part of the story ahead of the next decision on 3 November 2026.