Changes to interest rates could have less impact on household spending than traditionally thought, which means the Reserve Bank might have to lift or cut rate by more to achieve its aims.
Despite the RBA hiking interest rates in one of its sharpest tightening cycles in decades after the COVID-19 pandemic, Australians only trimmed their spending by a relatively small amount, the e61 Institute found in a research paper released on Friday.
That is because mortgage-holders were able to use offset accounts as a buffer to smooth out spending.
Challenging conventional economic wisdom
The findings challenge the conventional wisdom that, because Australia has a relatively high amount 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.
RBA impact delayed
Australia's mortgage market is 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.
"During the rate-hike cycle, only about 7 per cent of variable-rate borrowers were liquidity-constrained according to household survey data," Dr La Cava said.
"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.
"Even though interest payments have fallen for variable-rate borrowers, many have not automatically lowered their scheduled payments," Dr La Cava said.
"That means rate cuts may deliver less of an immediate boost to spending than textbook models would predict."
Inflation followed rate cuts
After 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 has also picked up quicker than expected, 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 expected to leave the cash rate steady until at least mid-2026.
Some economists even predict the next move will be up, not down, following Tuesday's rate hold.
