Interest rate cuts may have less effect on household spending than previously thought, according to new research from the e61 Institute.
The study found that even during one of Australia’s sharpest rate-hiking cycles in decades, households only trimmed their spending by a small amount, AAP and CBA reported.
That muted response was largely due to borrowers using offset and redraw accounts to cushion the blow of rising mortgage repayments.
“Household spending barely flinched,” report co-author Gianni La Cava (pictured) 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.”
The research challenges long-held economic assumptions that Australia’s high share of variable-rate loans makes it especially sensitive to rate changes. The study found little difference in spending patterns between variable-rate and fixed-rate borrowers, even though the former saw their repayments rise by an average of $14,000 over 18 months.
Australia’s mortgage market is unusually flexible, with about 90% of variable-rate borrowers saving through redraw facilities, providing extra liquidity as rates increased.
“During the rate-hike cycle, only about 7% of variable-rate borrowers were liquidity-constrained according to household survey data,” La Cava said. “With savings plentiful, the RBA's tightening took longer to bite.”
The same dynamic could now work in reverse. As the Reserve Bank lowers interest rates, households may choose to rebuild savings buffers rather than increase spending.
“Even though interest payments have fallen for variable-rate borrowers, many have not automatically lowered their scheduled payments,” La Cava said. “That means rate cuts may deliver less of an immediate boost to spending than textbook models would predict.”
After its record tightening cycle, RBA began cutting rates in February, believing inflation was under control. However, price pressures have since picked up again, with inflation running above RBA forecasts and household spending rising 0.9% in the June quarter, compared with the central bank’s expected 0.6%.
Economists now expect RBA to hold the cash rate steady until mid-2026, with some warning that the next move could even be another rate hike if inflation continues to accelerate.
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