Interest Rate Cuts May Have Less Effect on Household Spending
Mortgage holders faced the fastest interest rate increases in decades following the pandemic, yet a new study suggests changes in interest rates might influence household spending less than traditionally believed. This implies that the Reserve Bank of Australia (RBA) may need to adjust rates more aggressively to meet its objectives.
Research Findings by e61 Institute
The e61 Institute released a paper on Friday revealing that despite one of the sharpest tightening cycles post-COVID-19, Australians reduced their spending only marginally. This limited impact occurred because mortgage holders used offset accounts as a financial buffer to maintain spending levels.
Challenge to Conventional Monetary Policy Views
It is often assumed that Australia's high proportion of variable-rate home loans makes the mortgage market a sensitive channel for monetary policy to affect inflation. However, the study's findings question this assumption.
"Household spending barely flinched," said report co-author Gianni La Cava. "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 research also found minimal differences in spending changes between variable-rate borrowers, who saw repayments increase by about $14,000 on average in 18 months, and fixed-rate borrowers.
Summary
This study highlights that mortgage flexibility and savings buffers reduce the influence of interest rate changes on spending, suggesting monetary policy may require stronger moves to impact the economy effectively.