Interest rate hikes: Reserve Bank of Australia now worried about pullback in consumer spending

Reserve Bank of Australia governor Philip Lowe says higher interest rates are leading to greater uncertainty about the outlook for household spending — which may now fall.

In announcing on Tuesday the third increase to the official cash rate in three months, Dr Lowe said despite record retail spending this year, the rising cost of living was putting pressure on household budgets.

“One source of ongoing uncertainty about the economic outlook is the behaviour of household spending,” Dr Lowe said in his post-board meeting statement.

“The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates.

“Housing prices have also declined in some markets over recent months after the large increases of recent years.”

Economists at both ANZ and Westpac now expect the RBA to pass on another 50 basis point hike next month — which would be the third in a row and the fourth successive hike since May.

The Commonwealth Bank at this stage expects a 25bp increase next month and its head of Australian economics, Gareth Aird, pointed out another 50bp hike in August would mean the RBA had tightened much more aggressively than any other central bank apart from the US Federal Reserve.

Mr Aird expects economic momentum to cool from now, bringing inflation down next year. This year’s data would continue to be strong regardless of RBA action.

“Higher rates will take some time to put downward pressure on inflation because there is a lag between changes in monetary policy and the impact on consumer prices,” he said.

ANZ head of Australian economics David Plank said the continuing tightening of the labour market increased the urgency of the RBA to return the cash rate to “at least” neutral — or about 2.5 per cent.

In his statement, Dr Lowe said “medium-term inflation expectations remain well-anchored and it is important that this remains the case”.

Mr Plank said this suggested the RBA would respond to inflation strongly to keep expectations in check — particularly given Dr Lowe did not refer to strong consumer spending being its “central scenario”, as he did last month.

BIS Oxford Economics head of macroeconomic forecasting Sean Langcake said the RBA was “attempting to walk a fine line” between responding to the bleak inflation outlook and supporting growth.

“While some drivers of inflation will be unaffected by higher rates, tighter policy is needed to dampen demand-driven inflation,” he said.

“But the RBA will be wary of too sharp a correction in household spending given the current pressures on household budgets from rising prices and interest rates.”

Westpac chief economist Bill Evans said there now appeared to be increased confidence for the prospects to lower inflation. He said Dr Lowe made no reference to the unprecedented nature of two successive 50bp hikes — which he may have done “if he was signalling the intention to scale back the moves”.

Mr Aird said that despite Dr Lowe’s “pragmatic” statement, there remained a risk the RBA would over-tighten.

“The stock of household debt has not disappeared and the Australian household sector is more sensitive to changes in interest rates than at any other time because the level of household debt to income sits at a record high,” he said.

Home values in Sydney and Melbourne, the country’s most expensive markets, slipped again in June, according to CoreLogic, while growth in Brisbane — where prices are up 27 per cent in a year — is flat.

Mr Aird said although there was no linear connection to property prices and the economy, the impact of falling house prices on the economy would intensify and continue the longer that they fell.