Interest rate cuts might have less impact than thought
After the COVID-19 pandemic, mortgage holders faced the fastest series of interest rate hikes in decades. Yet a study by the e61 Institute suggests that changes in rates may influence household spending less than previously believed. This could force the Reserve Bank of Australia (RBA) to adjust rates more aggressively to meet its goals.
The research found that despite the RBA executing one of its sharpest tightening cycles, Australians only reduced their spending slightly. Many households relied on offset accounts as financial cushions, softening the blow of higher repayments.
These findings question the common belief that Australia’s mortgage system—dominated by variable-rate loans—makes the economy highly responsive to monetary policy.
"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 report also noted minimal spending differences between variable-rate borrowers, whose repayments increased by about $14,000 over 18 months, and those with fixed-rate loans.
Author’s summary
Research shows Australian households softened the impact of rapid rate hikes, revealing that monetary policy may now have a weaker influence on spending behavior.