Interest Rate Cuts Might Have Less Impact Than Thought
Mortgage holders faced the fastest interest rate hikes in decades following the pandemic, but a recent study suggests that changes in interest rates may have a smaller effect on household spending than traditionally assumed. This implies the Reserve Bank might need to adjust rates more aggressively to reach its goals.
Despite one of the sharpest rate tightening cycles by the Reserve Bank of Australia (RBA) since COVID-19, Australians only reduced their spending slightly, according to research by the e61 Institute published on Friday.
This limited spending reduction is partly because mortgage holders used offset accounts as a financial buffer, which helped stabilize their spending habits.
The study challenges common beliefs that Australia's high proportion of variable-rate home loans makes the mortgage market a highly sensitive channel for monetary policy to control inflation.
"Household spending barely flinched," said Gianni La Cava, co-author of the report. "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."
The data also shows little difference in spending behavior between variable-rate borrowers, whose repayments increased by about $14,000 on average over 18 months, and fixed-rate borrowers.
Summary
Monetary policy may have reduced influence on household spending in Australia due to mortgage flexibility and savings buffers, requiring more significant interest rate adjustments to affect economic behavior.