CBA’s economics team has released its Household Spending Intentions Index for August 2022, which shows that the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes have begun to dent discretionary spending.
Key findings are as follows:
The CommBank HSI Index rose by 0.8%/mth in August 2022, taking the index up to 115.5 (just below the peak of 116.2 in December 2021).
The HSI Index showed a mixed performance in August –reflecting the previous strong momentum in the Australian economy, higher inflation pressures and the beginning impact of the RBA’s monetary policy tightening.
The annual rate is now up 15.1%/yr –partlyreflecting the weakness in August last year and the ‘delta lockdowns’.
The increase in the HSI Index in August was narrowly based, with gains centred on Home buying, Health & fitness, Motor vehicles and Household services.
In contrast, weakness was seen in spending on Travel, Entertainment, Transport, Retail and Insurance costs.
Commenting on the result, CommBank Chief Economist, Stephen Halmarick, noted that interest rate increases and inflationary pressures are beginning to take effect on household spending:
“While the index rose in August, we’re seeing weakness in discretionary spending following recent interest rate increases and a growing move to value purchasing. For instance while grocery spending remains high, we’re hearing customers are swapping to value products in response to higher food prices.
“Spending for household services has also risen 4 per cent in August, with charitable donations leading the category, likely signalling a stressful environment for many in the community.”
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Last week, the CBA’s head of Australian economics, Gareth Aird, released research showing that it takes an average of two-to-three months for an increase in the official cash rate to be felt by mortgage holders.
This means that most of the RBA’s rapid monetary tightening has yet to be felt by Australians with mortgages, meaning “there’s a degree to which the RBA Board is flying blind. It has simply been too early for the spending data to pick up the impact of the already delivered rate hikes”.
Separately, Aird cautioned that the RBA’s aggressive tightening is “like having five shots of vodka in an hour and saying, everything is OK. But you know that it will soon have a big effect”.
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In the RBA’s monetary policy statement accompanying last week’s rate hike, governor Phil Lowe stated that “the Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path”.
Accordingly, the official cash rate will rise further over coming months.
The risk is that the delayed impact of the RBA’s aggressive rate hikes will hit around the all-important Christmas period, smashing household consumption and hammering the nation’s growth.
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Retailers should prepare themselves for a poor Christmas.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
