Research suggests Reserve Bank of Australia may need larger moves to influence economy
Interest rate adjustments may have a smaller influence on household spending than previously assumed, according to new research, potentially requiring the Reserve Bank of Australia (RBA) to make more significant changes to achieve its policy objectives.
A report recently released by economic research firm e61 Institute found that, despite the RBA implementing one of its most rapid tightening cycles in decades following the COVID-19 pandemic, Australian households reduced their expenditure by only a modest margin. The research attributes this to mortgage holders using offset accounts to maintain their spending levels.
The study questions the established view that Australia’s high proportion of variable-rate home loans makes the mortgage market a particularly sensitive channel for monetary policy to affect inflation.
“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 analysis found minimal difference in spending between those with variable-rate mortgages – whose repayments increased by roughly $14,000 on average over 18 months – and those with fixed-rate loans.
Australia’s mortgage market is noted for its flexibility, with approximately 90% of variable-rate borrowers using redraw facilities, providing a financial buffer when repayments rise.
“During the rate-hike cycle, only about 7% of variable-rate borrowers were liquidity-constrained according to household survey data,” La Cava said. “With savings plentiful, the RBA's tightening took longer to bite.”
The report also suggests that this dynamic could limit the effectiveness of rate cuts. Instead of increasing spending, borrowers may choose to rebuild their savings buffers when rates fall.
“Even though interest payments have fallen for variable-rate borrowers, many have not automatically lowered their scheduled payments,” said La Cava pointed out. “That means rate cuts may deliver less of an immediate boost to spending than textbook models would predict.”
Following the RBA’s record tightening phase, the central bank began reducing rates in February as inflation appeared to be under control and unemployment edged higher. However, inflation has since exceeded the bank’s forecasts, and household spending has risen more quickly than anticipated, increasing by 0.9% in the June quarter compared to the RBA’s forecast of 0.6%.
The RBA is now expected to keep the cash rate unchanged until at least mid-2026. Some economists anticipate that the next adjustment could be an increase, following the bank’s decision to hold rates steady earlier in the week.
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