In a speech on Wednesday night (9 November), Reserve Bank of Australia (RBA) deputy governor Michelle Bullock said the behaviour of households as interest rates and inflation rise is a major uncertainty for the central bank.
“Although household debt hasn’t risen much over the past decade relative to income, it is still high so rising interest rates could make servicing debt much harder. On the other hand, one of the legacies of the pandemic was a large build-up in household savings buffers,” she said.
“With fiscal support for incomes during the pandemic, low interest rates increased the cash flow of households with mortgages and at times limited opportunities to spend and savings increased markedly over the past couple of years.”
The RBA estimates that households overall accumulated more than $250 billion in additional savings during the pandemic. With just over nine million households in Australia, this equates to around $28,000 per household.
However, Ms Bullock said most of this saving has been among households at the upper end of the income distribution, reflecting in part, the constraints on consumption of discretionary services.
“So while households on lower incomes with lower buffers are likely to cut back on consumption, some households could draw down their savings to support consumption in the face of rising interest rates and cost-of-living pressures,” she said.
“Furthermore, the response of household consumption to falling housing prices is uncertain. We know that consumption typically weakens as asset prices, and particularly housing prices decline but the magnitude is difficult to forecast. And despite recent falls, housing prices still remain substantially above their level prior to the pandemic.”
However, inflation and rising interest rates are having a profound impact on consumer confidence. The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 6.9 per cent from 83.7 in October, to 78.0 in November.
This month’s print of 78.0 is now below the low point of the GFC (79.0) and only slightly higher than when the COVID-19 pandemic first hit in April 2020 (75.6).
More consumers expect substantial follow-on rate rises. Among those surveyed after the RBA decision, nearly 60 per cent expect rates to increase by 1 percentage point or more over the next year, up on 54 per cent in the October survey.
The Westpac Index found nearly 40 per cent of consumers expect to spend less on gifts this year — the highest proportion planning cutbacks since Westpac started asking the question in 2009, the average being 33 per cent.
