Household savings eyed by RBA as it ponders interest rate moves

Rebecca Le MayNCA NewsWire
Household spending is they key to an interest rate rise. NCA NewsWire/Joel Carrett
Camera IconHousehold spending is they key to an interest rate rise. NCA NewsWire/Joel Carrett Credit: News Corp Australia

Whether households spend the unusually high amount of savings they hoarded last year as the pandemic took hold is a key uncertainty around the Reserve Bank of Australia’s next steps.

In its latest Statement on Monetary Policy released on Friday, the central bank noted all household income groups saved more than usual over 2020, with the bulk of the additional savings – unsurprisingly – accumulated by the top 40 per cent of earners.

Savings peaked mid-year but the reduced households savings ratio in the December quarter was still high, consistent with activity restrictions in place at the time, the RBA said.

“Household wealth has increased strongly of late, mostly because housing prices have risen but also because households accumulated an unusually large amount of additional savings out of income over 2020,” the RBA said.

While JobKeeper and various social assistance measures that played an important role in boosting household incomes over the past year have largely expired, strong growth in employment has broadly cushioned the effect.

“Consumption spending has therefore rebounded rapidly as restrictions have eased and is expected to continue expanding strongly over the next few years,” the RBA said.

“How far households might draw on their strengthened balance sheets to support their spending represents an important source of uncertainty around the outlook for consumption.

“If the spending response to increased wealth is stronger than usual, a stronger economic path than the one envisaged in the baseline forecasts would eventuate.”

Under that scenario, the inflation rate would pick up to around 2.25 per cent by the middle of 2023 – within the central bank’s 2 to 3 per cent target band.

australian dollars
Camera IconIf households spend the savings they hoarded last year, the inflation rate could rise quicker than the RBA has forecast and trigger an interest rate rise. Credit: istock

Conversely, a weaker path could see households instead continue to strengthen their balance sheets by buying assets or paying down debt, the RBA said.

That would leave underlying inflation broadly steady, still around 1.5 per cent by mid-2023.

As expected, the RBA earlier this week left interest rates at the historic low level of 0.1 per cent.

“While the economy is recovering faster than expected, the RBA is still a long way away from seeing its stated requirements for a rate hike – being a tight jobs market, wages growth well above 3 per cent and actual inflation sustainably within the 2-3 per cent target range,” AMP Capital chief economist Shane Oliver said at the time.

“So a rate hike is still a fair way off, although I think it will come before the RBA’s expectation for ‘2024 at the earliest’.”

Originally published as Household savings eyed by RBA as it ponders interest rate moves

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