Borrowers dodge rate rise as consumers trade down to save cash

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Home buyers were spared a pre-Christmas interest rate increase from the Reserve Bank amid signs the economy and jobs markets are slowing, with small businesses now reporting that cash-strapped consumers are trading down their purchases under the weight of cost-of-living pressures.

Minutes from the RBA board’s December meeting show it considered pushing the official cash rate to a 12-year high of 4.6 per cent before deciding there was enough evidence that previous rate hikes, on top of easing global inflationary pressures, were starting to work their way across the country.

Last week, the latest job figures showed unemployment lifted to 3.9 per cent in November.Credit: Natalie Boog

The bank lifted the cash rate by 1.25 percentage points through 2023, adding almost $500 to the monthly repayments on a $600,000 mortgage.

At its final meeting of the year, it considered another quarter percentage point increase with the minutes revealing concerns that inflation was being driven by domestic demand and could remain above the RBA’s 2-3 per cent target band into 2025 and beyond.

But the bank held fire as board members noted household spending was falling in per capita terms, with many people suffering a “painful squeeze” on their finances from previous rate increases and signs the jobs market was starting to lose steam.

“Members acknowledged that consumption growth had been quite weak, as many households are experiencing a painful squeeze on their finances, with inflation and higher interest rates weighing on real disposable incomes,” the minutes showed.

“Members also noted that the pace of disinflation in some other countries over recent months had accelerated. If emulated in Australia, this would be helpful in bringing inflation back to target.”

The day after the board meeting, the national accounts revealed that the economy expanded by just 0.2 per cent in the September quarter.

The minutes show the bank believe there is “the possibility of a larger rise in the unemployment rate than anticipated”.

Last week, the latest job figures showed that unemployment lifted to 3.9 per cent in November.

Financial markets believe the RBA has finished with rate increases, pricing in at least one cut by the middle of next year.

The Commonwealth Bank’s head of Australian economics, Gareth Aird, also believes the Reserve Bank’s next move will be a rate cut despite its anti-inflation rhetoric and the consideration of a rate rise at its December meeting.

“Against the backdrop of rising unemployment and falling GDP per capita, the board will be quite reluctant to tighten policy further. Indeed, the need for further rate rises has dissipated,” he said.

Aird expects the RBA to start cutting rates from September next year, finishing 2024 with the cash rate at 3.6 per cent.

Capital Economics analyst Abhijit Surya said it appeared the Reserve Bank was increasingly concerned about the state of the domestic economy.

“We think the combination of flagging output growth and sharper-than-expected disinflation will prompt the RBA to start cutting rates as early as May 2024,” he said.

One area feeling the brunt of rate increases and inflation is the small business sector.

Tax and business service company MYOB, in a survey of more than one thousand small business operators, found 40 per cent of their customers were spending less frequently and 27 per cent had sought a special price deal while 22 per cent were buying cheaper options.

Almost one-in-three businesses said cost-of-living increases had lifted the financial pressure on their operations, 27 per cent reported fewer customers and 19 per cent had noted changes in consumer behaviour.

MYOB chief executive officer Paul Robson said consumer behaviour was clearly changing under the weight of cost pressures. “More than just cutting back on spending, people are bartering with businesses for a better deal, which demonstrates how deep the cost-of-living crisis is beginning to bite,” he said.

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