Mortgage holders are pulling back on discretionary spending as higher interest rates increasingly shape household budgets, according to Westpac's Q2 2026 Consumer Panel, though the bank says the adjustment looks controlled rather than distressed.
Average consumer spending across the panel fell 0.2% for the quarter, the first quarterly decline in a year, with annual growth slowing to 2.9%. Much of the weakness traced back to transport, partly due to airfare refunds linked to the Middle East conflict; excluding transport, spending rose 0.5%, in line with the prior quarter.
Westpac economist Illiana Jain (pictured) said the report shows "higher interest rates are increasingly influencing household behaviour, but not through a disorderly draw-down in savings."
The moderation comes against a backdrop of gradually easing but still-elevated inflation, with the ABS's quarterly CPI estimate at 4% for the year to May 2026 — still above the RBA's 2–3% target band, though easing from the peak reached earlier in the tightening cycle.
Against that backdrop, the slowdown wasn't spread evenly. Spending fell for both mortgage holders and non-mortgage holders, but the decline was sharper among mortgagors, with continued softness in recreation and culture spending pointing to borrowing costs shaping discretionary choices. Younger customers, aged 18 to 34, kept increasing spending, concentrated in dining, recreation, and household furnishings.
Savings balances kept climbing, up 1.2% over the quarter and 8.3% higher over the year, suggesting households are moderating spending rather than drawing down reserves.
The build was strongest among mortgage holders, up 1.8% versus 1.1% for those without a mortgage — a gap Westpac links to households bracing for further rate rises, with the Q2 Consumer Panel finding that, among mortgage holders specifically, over 72% expect mortgage rates to rise further over the next year.
Average mortgage buffers, measured in months of essential expenses covered, eased slightly to 22 months from 22.5 in the first quarter, still comfortably above the 19.2-month low of the previous cycle. The median buffer, seen as a more representative gauge for typical borrowers, sits at six months, broadly matching pre-2022 levels.
Westpac said the household data supports its view that the Reserve Bank will hold rates steady in August, even as the board retains a hawkish bias. The report noted the current level of restrictiveness already appears to be tempering demand, reducing the urgency for further tightening.
That view isn't universally shared — separate Roy Morgan data showed inflation expectations ticking up for three consecutive weeks amid renewed Middle East tensions, a trend Roy Morgan CEO Michele Levine said was "putting the prospect of additional interest rate increases by the RBA back in focus" ahead of August's meeting. The next RBA decision, due in mid-August, will settle which read was closer to the mark.
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