RBA rate outlook less certain as consumer buckles

There was a clear shift in language from the Reserve Bank at its March board meeting, with the Governor indicating that a potential pause in interest rate hikes might be on the table.

It was only a month ago that he was warning of multiple rate increases to come, and a big part of that shift is the growing pressure we’re seeing on the Australian consumer.

The December quarter national accounts last week showed consumer spending was a lot softer than had been expected going into year end, with some pretty disturbing elements around income and savings flows across the household sector as a whole. 

More timely data from the Westpac card tracker suggests the weak spending picture from the fourth quarter has carried over into 2023, and going forward it looks like a very constrained outlook. 

There has been a big hit to real incomes from high inflation and rising interest rates, which means that there’s not a lot of room for continued gains in spending over the course of this year. In fact, further gains will rely on households starting to draw down on the savings buffer that many had built up during the COVID period.  

As a result, we’ve lowered our growth forecasts for the consumer this year and now expect consumption to rise by just 0.7 per cent.

As interest rates rise we’ll see more stress start to emerge across the mortgage belt, as well as in some low income segments and among renters. 

If you were just to look at the consumer, then you’d say there’s a strong case to pause the rate increases. But the RBA’s primary concern is still inflation and they need to be absolutely comfortable that it’s going to track back from that 8 per cent high last year to its 2-3 per cent target band over the medium term. 

For that, they will need to see more than just a slowdown in consumer spending. They’ll want to see slower inflation abroad, as well as some softening in the domestic labour market along with signs that wages growth is under control. 

The RBA will go into its April meeting with a few different options on the table, with the outcome likely to depend on how the latest batch of economic data pans out. 

Westpac economists still see further quarter percentage point rate hikes in April and May, up to a terminal rate of 4.10 per cent, but it’s a much more open question now about future RBA policy moves.