RBA expected to hold steady as resilient household demand offsets case for rate relief
Mortgage holders hoping for interest rate cuts may face a longer wait after a sharp rise in household spending in October raised concerns that stronger demand could sustain inflation and limit the Reserve Bank’s room to ease policy.
New data from the Australian Bureau of Statistics (ABS) showed household spending rose by 1.3% in October in nominal terms, the largest monthly increase since January 2024, with spending up across all nine categories. Household expenditure is now 5.6% higher than the same time last year.
“Discretionary spending surged this month led by goods as promotional events saw households spend more on clothing, footwear, furnishings and electronics following months of weaker spending in these categories,” said Tom Lay, ABS head of business statistics. “Services spending also rose in October, as major concerts and cultural festivals drove up demand for catering, hospitality and hotel stays in major cities.”
The stronger spending data follow a recent Senate testimony from Reserve Bank of Australia (RBA) governor Michele Bullock (pictured right), who acknowledged that the latest lift in inflation had come as a surprise to the central bank.
“Even if we’re in balance, there are upside risks [to inflation] if the economy grows a bit quickly, if we’re already at potential,” she said. “So that’s sort of the issue we’re dealing with.”
Bullock also pointed to input cost pressures and the capacity of firms to increase prices as demand improves. “Costs are biting on businesses, and that they’re able to pass them on doesn’t necessarily mean that we’re operating beyond potential, but it does mean that demand is recovering enough to allow businesses to pass on costs,” she added.
The October increase in household spending was more than double the 0.6% rise expected by some market economists, according to My Bui, economist at AMP. At the same time, she said the data were consistent with the RBA’s assessment that household spending is gradually recovering and capacity in parts of the economy remains tight. The economist pointed to some ongoing constraints on supply, which, in turn, can put upward pressure on prices.
“We think that there is still some fragility given the noisy nature of the data but acknowledge that the Reserve Bank will likely remain on hold for the foreseeable future, given robust spending data, higher than expected inflation, and an unemployment rate of 4.3%,” Bui said.
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