Asked how rate rises bring inflation down, Governor Michele Bullock pointed not to home loans but to the Australian dollar, saying the Reserve Bank's research identifies the exchange rate as the most important channel.

Public debate about interest rates in Australia tends to start and finish with mortgages. When the cash rate rises, commentary turns to repayments, household budgets and the housing market. Governor Michele Bullock did not dismiss that link at her media conference on 29 September 2026, the day the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60 per cent. But she offered a more nuanced account of how monetary policy actually works.

"according to our research, in fact, the most important channel is the exchange rate channel," she said.

That remark, made in passing, deserves a closer look, because it shifts the focus from what higher rates do to household budgets towards what they do to the price of everything Australia imports.

Not a dismissal of the mortgage channel

The headline question needs a careful answer. Bullock did not say mortgages are irrelevant. On the same day she said: "Those who have mortgages, yes, this clearly impacts them and it hurts them." She described the cash-flow effect in plain terms, saying borrowers have "less cash flow, and they've got less money to spend on things."

The mortgage channel is also clearly visible in the data. Kent said in August that "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income."

What Bullock added was that this cash-flow channel is only one of several through which monetary policy operates. The exchange rate, in her description of the RBA's research, ranks first. The material available does not set out the research itself, its methodology or the relative size of each channel, so the ranking is reported here as the Governor stated it, without further detail.

How the dollar does the work

The mechanism Bullock described is straightforward. "raising interest rates impacts import prices. It makes imports cheaper," she said.

Assistant Governor (Financial Markets) Christopher Kent made the same point in a Sydney speech on 13 August 2026: "A higher exchange rate helps moderate inflation by lowering the domestic price of imports."

Put simply, the chain implied by their remarks runs like this:

  1. The cash rate rises relative to where it would otherwise be.
  2. The Australian dollar tends to be firmer as a result.
  3. A firmer dollar lowers the Australian-dollar price of imported goods and services.
  4. Lower import prices feed through to slower inflation.

Kent noted in August that the trade-weighted value of the dollar had risen by about 5 per cent since the start of 2026. The Board's decisions are only one influence on the currency, and the RBA material reviewed here does not attribute a specific share of that rise to monetary policy.

Where the dollar stands now

The RBA's homepage, at 4.00 pm on 9 October 2026, recorded the following exchange rates:

  • US dollar: 0.6979
  • Trade-weighted index: 64.8
  • Chinese renminbi: 4.6738
  • Japanese yen: 110.34
  • Euro: 0.6215

The bilateral rates show the dollar against individual currencies, while the trade-weighted index measures it against a basket of trading partners' currencies, which makes it the more relevant gauge for import prices overall. The RBA material reviewed here does not include a comparable reading from the start of the year.

The commodity price data offer another window on the currency's strength. The RBA's Index of Commodity Prices for September 2026 rose 15.5 per cent over the year in SDR terms but only 6.6 per cent in Australian-dollar terms. That gap is consistent with a firmer Australian dollar reducing the local-currency value of commodity price gains.

Why this matters for the inflation fight

The exchange rate channel is especially relevant this year because many of the price pressures the Board is fighting have international roots. Bullock said on 29 September that "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher", and the Board's statement cited further disruption to global oil supply from the Middle East conflict. In her 18 September Opening Statement to the House of Representatives Standing Committee on Economics, she said: "Oil and related prices have increased sharply again and will add directly to inflation."

A firmer dollar cannot undo those shocks, but it can soften their local-currency impact at the margin.

The channel also interacts with the AI investment boom. Bullock observed that, for data centres, "A lot of that is imported, so it's actually not directly impacting on demand in Australia." To the extent such equipment is priced in foreign currencies, the exchange rate affects its cost in Australian-dollar terms.

There is a counter-current. Kent noted in August that AI investment and higher offshore bond yields could make a given cash rate less restrictive. Global forces can work against domestic policy as well as with it.

Headline CPI rose 4.0 per cent over the year to August 2026. Underlying inflation has been about 3.5 per cent for the past six months, according to Bullock, and the trimmed mean measure was 3.6 per cent in the June quarter. The target is 2–3 per cent. Bullock said domestic capacity pressures have driven inflation, and the Board judged that a further tightening was warranted to return inflation to target in a reasonable period.

None of this tells us what the Board will do at its next meeting, which concludes with a decision at 2.30 pm on 3 November 2026. Bullock said plainly on 29 September: "I'm not going to give you forward guidance."

The bottom line

Bullock's comment reframes a familiar debate. Mortgage holders do feel rate rises, and the Governor acknowledged that directly. But according to the RBA's research, as she described it, the exchange rate is the most important channel through which higher rates lower inflation, by making imports cheaper. Kent made the same case in August, when the trade-weighted dollar was up about 5 per cent for the year. The RBA has not published, in the material reviewed here, how large each channel is, so the ranking is best understood as the Governor's summary rather than a precise measure.