Changes to interest rates may potentially have less of an impact on household spending than previously thought or forecasted, according to an update from Australia’s Commbank, which also noted that this means the reserve bank might have to lift or cut rates by more in order to achieve its stated aims and objectives.
Commbank pointed out in its report that even though the RBA hiking interest rates in one of its sharpest tightening cycles in decades after the COVID-19 outbreak, Australian consumers only slashed their spending by “a relatively small amount, the e61 Institute found in a research paper released on Friday.”
According to the update from Commbank, this may be due to mortgage-holders being able to use offset accounts “as a buffer to smooth out spending.”
The research findings now seemingly challenge the conventional wisdom that, because Australia has a relatively high number of variable-rate home loans, the mortgage market is an “especially sensitive transmission pathway for monetary policy to influence inflation.”
“Household spending barely flinched,” report co-author Gianni La Cava said.
“Australia’s experience shows that when mortgage flexibility and large savings buffers are in play, the transmission of monetary policy may become weaker and slower.”
There was little change in spending between “variable-rate borrowers, whose repayments rose by about $14,000 on average over 18 months, and fixed-rate borrowers.”
Australia’s mortgage market is said to be unusually flexible, with around 90 per cent of variable-rate mortgagors saving “through redraw facilities, providing borrowers with a liquidity buffer when repayments shot up.”
Dr La Cava said:
“During the rate-hike cycle, only about 7 per cent of variable-rate borrowers were liquidity-constrained according to household survey data. With savings plentiful, the RBA’s tightening took longer to bite.”
The same effect could work in the inverse and “dampen the RBA‘s ability to boost economic activity by cutting rates, with borrowers opting to rebuild buffers instead of increasing spending.”
As noted in the update:
“Even though interest payments have fallen for variable-rate borrowers, many have not automatically lowered their scheduled payments. That means rate cuts may deliver less of an immediate boost to spending than textbook models would predict.”
Following its record tightening cycle, the RBA started lowering rates in February, with inflation apparently “under control and unemployment slowly rising.”
But inflation has since shot up “above the central bank’s forecasts.”
Household spending in Australia has also picked up a lot faster than actually anticipated, “rising 0.9 per cent in the June quarter, compared with the RBA’s prediction of 0.6 per cent.”
The Reserve Bank is now widely expected to leave the “cash rate steady until at least mid-2026.”
Some economists now even forecast the next move will “be up, not down, following Tuesday’s rate hold.”