The Reserve Bank is expected to cut the cash rate for the third time this year on Tuesday, in a move that will give further relief to millions of householders with a mortgage – and hopefully spark some life into Australia’s struggling economy.
The economics teams at Australia’s four largest banks are now unanimous that the RBA board will lower the central bank’s cash rate target by a quarter of a percentage point to 3.6% at the end of the board’s two-day meeting.
Traders in financial markets are even more bullish, pricing in consecutive 0.25 percentage point rate cuts in July and August, followed by a third by November.
That would take the cash rate to 3.1% from 3.85%, but experts are less convinced rates will fall that far this year, with most suggesting two cuts, rather than three, is more likely.
Whatever the case, the outcome will mean interest bills will be hundreds of dollars lower for borrowers, who emerged from the pandemic period with more debt than ever.
A rate cut on Tuesday will drop the repayment on a $500,000 home loan from $3,200 per month to $3,124 – a saving of $76.
That’s a saving of about $230 per month by the time the RBA rate cuts in February, May and potentially next week are passed on to borrowers.
So far, however, the prospect of lower interest bills for the 3.3m mortgaged households has done surprisingly little to boost consumer spending.
Total household spending has barely budged this year, according to the Australian Bureau of Statistics, with signs of life only emerging in the latest figures from May.
NAB’s head of market economics, Tapas Strickland, said consumption was on track for another weak quarter.
“That still argues to the view that the RBA should cut rates next week, and quickly bring the cash rate down towards neutral” – or to 3.1% by November, he said.
Retail sales have been particularly weak.
After bouncing around wildly as the country went in and out of Covid lockdowns, sales per person, and after adjusting for inflation, have steadily declined to be only 4.5% above pre-pandemic levels, according to figures provided by AMP.
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While inflation is now firmly under 3% and expected to stay there for the foreseeable future, Australia remains a much more expensive place, a fact we are reminded of every day.
Prices are 21% higher than they were five years ago, according to the ABS’s consumer price index (CPI).
Belinda Allen, a senior economist at CBA, said she had been surprised by how consumption was not picking up in response to falling inflation, climbing wages and lower interest rates.
The CBA’s internal data on its millions of banking customers suggest many Australians are keeping the extra cash in their pockets.
“We see roughly one-third of all transactions in the economy, (and) there just does seem to have been this shift by the consumer to save and pay down debt rather than spend,” Allen said.
“We’ve been waiting for this to shift, and it looks like it’s taking longer than we expected.”
Allen’s early theory is that households remain “scarred” by the experience of the past few years.
This reticence to spend, alongside the potential fallout from Donald Trump’s trade war, is a key risk to what is otherwise a reasonably positive outlook for the Australian economy in the months ahead, she said.