Interest rate cuts might have less impact than thought

Changes to interest rates could have less of an impact on household spending than traditionally thought, which means the Reserve Bank might have to hike or cut harder to achieve its aims.

Despite the RBA hiking interest rates in one of its sharpest tightening cycles in decades after the COVID-19 pandemic, Australians only trimmed their spending by a relatively small amount, the e61 Institute found in a research paper released on Friday.

That is because mortgage-holders were able to use offset accounts as a buffer to smooth out spending.

The findings challenge the conventional wisdom that, because Australia has a relatively high amount of variable-rate home loans, the mortgage market is an especially sensitive transmission pathway for monetary policy to influence inflation.

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