Households are being squeezed by higher interest rates but is it enough for the Reserve Bank?

A new survey of consumers has found they are growing more resilient in their spending patterns thanks to higher job security and rising assets. So what’s that likely to mean for interest rates?

UBS Australia chief economist George Tharenou. Picture: Hollie Adams

Households are being squeezed by higher interest rates but is it enough for the Reserve Bank?

Perhaps contrary to what the Reserve Bank would like to see as it battles high inflation, a new survey of consumers has found they are growing more resilient in their spending patterns for the coming year as higher job security and rising asset prices counter cost of living challenges.

The latest UBS Evidence Lab survey of about 1000 adults showed spending intentions in aggregate for the year ahead lifted further into positive territory to the highest level since at least 2019.

The rise in spending intentions versus the previous quarter was evident across several industries; especially in areas that were previously weak, including: food, eating out, overseas travel, and music-related entertainment, according to the quarterly survey conducted between May 16 and June 4.

Importantly, the survey found spending intentions by income level over the next 12 months were strongest for middle-income households earning between $48,000 and $120,000 per year.

Income expectations also continued to rise, again driven by middle-income households.

UBS said the lift in spending intentions suggested that the large tax cuts worth $23bn or almost 1 per cent of GDP from July will likely be largely spent rather than saved by households.

“Results from the June quarter survey were overall clearly on the positive side,” said UBS Australia equity strategist, Richard Schellbach.

“Interestingly, households reported their financial outlook was supported by the resilient labour market giving higher job security, and rising asset prices, albeit they are more worried about rising interest rates.”

Household expectations for interest rates over the next year were “materially higher”, potentially reflecting the RBA’s monetary policy board turning more hawkish over recent months.

After its meetings in May and June, RBA Governor Michele Bullock said the Board considered increasing interest rates again, in contrast to earlier in 2024 when it considered a rate cut.

However, consumer sentiment remained “deeply pessimistic”, according to Westpac.

The Westpac–Melbourne Institute Consumer Sentiment Index rose 1.7 per cent to 83.6 in June from 82.2 in May, with assessments of finances and buyer sentiment less negative, but inflation, interest rate, and growth fears weighing more heavily.

Half of consumers expected mortgage rates to rise over the next 12 months and an uncertain economic outlook is eroding confidence around jobs.

“Despite the improvement, consumer sentiment remains below its March level and still

firmly in deeply pessimistic territory,” said Westpac senior economist, Matthew Hassan.

“The survey detail suggests positives from fiscal support measures are being negated by increased concerns about inflation and the outlook for interest rates.”

“Budget and tax” and “inflation’” news was recalled as by nearly half of consumers surveyed.

The former was viewed as “less unfavourable” than in March, reflecting a “well-received” Commonwealth Budget, the cost-of-living measures delivered by both Federal and state governments, and the Stage 3 tax cuts set to commence on July 1st.

However, the news on inflation was viewed as less favourable than in March, with consumers’ assessments retracing most of the way back to the levels seen in December.

The RBA restated rate hikes in November in response to persistently high inflation.

Westpac said last week that a $60bn jump in federal and state government spending in the coming financial year will add to inflation and risks keeping interest rates higher for longer.

“Notably, the wider news backdrop is still viewed as broadly unfavourable,” Hassan added.

Across the fifteen detailed news topics covered, there has not been one “net favourable” assessment in two and a half years – the longest run of broadly negative news sentiment since Westpac began running the survey in the mid-1970s.

But even as many other consumer sentiment measures have remained weak over the last two years, the UBS Evidence Lab Australian consumer survey stayed constructive on the ability of Australian households to keep spending.

“The survey’s accurate calling of this cycle has been against consensus and other surveys,” said UBS’s Schellbach. “Recent months have seen an unusual level of dispersion in the views on the economy and the consumer from both economists and stock analysts.

Overall the UBS Evidence Lab Survey suggests middle-income earners have been emboldened by looming tax cuts and cost of living support announced by various State and Federal governments to increase their spending in the face of a rising cost of living.

UBS Australia chief economist George Tharenou said consumption volumes slowed by were “still not collapsing” in the March quarter, rising a “surprising” 1.3 per cent year-on-year.

Economic growth was “clearly weak” at 0.1 per cent on-quarter and 1.1 per cent on-year, but real consumption had a “material upside surprise”, re-accelerating to 0.4 per cent on-quarter.

Coupled with upward revisions, it boosted the year-on-year growth rate to 1.3 per cent, which wasn’t far below the decade average of about 2 per cent.

Mr Tharenou said the lowest household savings ratio since the global financial crisis was both a sign of consumers’ willingness to spend and the degree of stress in the community.

The household savings ratio fell to 0.9 per cent in the March quarter, the lowest since 2007.

“The bears may argue households are ‘running out of cash, but, UBS highlight the stock of ‘additional’ savings is still significant at about a 13 per cent share of household income,” Tharenou said. “Indeed, many households are still running down excess savings to fund spending.”

It came as personal credit growth accelerated to 3.2 per cent on-year, near the fastest since the GFC.

“This is probably both a bullish sign of increased willingness to ‘smooth’ spending amid weak real income but also a sign of ‘stress’ by some households facing a rising cost of living and fixed mortgage rates resetting much higher,” Mr Tharenou said.

Financial markets this week implied near a one in five chance of a rate hike in August as economists worried that tax cuts and energy bill relief from next week will worsen Australia’s inflation challenge.