Record super benefits driving consumption, inflation as RBA warns about further rate hikes

A surge in super benefits being paid out to retirees this year is driving consumption and keeping inflation higher, the RBA warns as it flags more rate hikes ahead.

The Reserve Bank has warned that it will have to lift interest rates again if inflation continues to remain sticky, as a record payout in superannuation benefits to member is driving consumption among older Australians and making economy more resilient to rate rises.

Analysis by UBS shows that superannuation benefits boomed to a near-record high of $29bn in the September and $145bn over the year, equal to 10 per cent of income.

The growth of benefits paid is a booming 17 per cent year-on-year — double the historical average since 2007 — and UBS economist George Tharenou said this boosting the income available for older households at the very time the RBA is trying to take heat out of the economy.

“This is underpinning the consumption of older households,” he said. “This trend is increasingly a material driver of the Australian consumer, and is making the economy more resilient to RBA rate hikes versus what historical models would normally suggest.”

Mr Tharenou said there was likely a “spillover” to other households via “bank of mum and dad”, either to support lumpy costs such as school fees, or perhaps mortgage payments for those facing financial squeeze, helping to keep mortgage arrears very low.

“This is a factor keeping inflation relatively sticky – a growing portion of households who are (much) less sensitive to RBA rate hikes which would normally crimp consumer demand enough to see downward pressure on prices,” he said.

His findings come as the RBA on Tuesday fired a warning shot to households about the prospect of further rate rises if economic data suggested inflation will take longer to return to target than it is willing to tolerate.

Minutes from the central bank’s November meeting, in which it lifted the cash rate by 25 basis points, showed the risk of not achieving its inflation target by the end of 2025 had increased and that it was appropriate that monetary policy should be adjusted to mitigate this.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome,” the minutes said.

“They observed that delaying such an adjustment would create a risk that a larger monetary policy response might be required in coming months, especially if inflation pressures turned out to be stronger than expected.”

It noted that there was a risk of inflation expectations increasing within the community if the RBA left the cash rate target unchanged for another month, particularly given the “board’s repeated statements that it has a low tolerance for inflation returning to target after 2025”.

Interest rates and inflationary pressures have started to see households spend less. Picture – Chris Pavlich.

November was the first time that the RBA had moved to lift the cash rate since June, with 425 basis points worth of rate hikes introduced since May 2022. The minutes showed the bank weighed a pause, but ruled it out because of concerns about inflation.

While inflation has fallen by a peak of 8 per cent in December 2022 to 5.4 per cent in the September quarter, the RBA noted that underlying inflation had become more “persistent” over recent months. This rate was much higher than the US and the UK.

It observed that inflation would only now hit the top end of its 2-3 per cent target by late 2025 now, later than it forecasted in August as a result of above-average price rises for a wide range of consumer goods and services.

Economists expect that the RBA might lift interest rates again as soon as February if there was an upside surprise to inflation data for the December quarter out in late January. UBS said the current environment meant the RBA would not be able to cut rates for at least the next 12 months.

Meanwhile, Reserve Bank governor Michele Bullock told the ASIC annual forum on Tuesday that in a world of fragmentation and conflicts there was potential for further supply shocks, which would make inflation harder to control.

“Although you want to look through supply shocks, if you keep getting them, there comes a point where everyone just expects inflation to remain high,” she said.

“If inflation expectations are readjusted, then that’s a problem. So that’s why you can’t ignore supply shocks when thinking about this.”

RateCity.com.au analysis shows that this month’s rate hike saw repayments on a $500,000 loan increase by $76 per month, $114 on a $750,000 mortgage and $152 each month for $1m owing to the bank.

Australian households have been hit with 13 interest rate rises since May 2022. Picture: Jonathan Ng

The RBA said financial pressures on households would be exacerbated by inflation remaining higher for a longer period than forecast.

The minutes come as The CommBank iQ Cost of Living Insights Report found that Australians aged between 25 and 29 have cut total spending by 5.1 per cent in the 12 months to September, on impacts caused by inflation, interest rates and surging housing costs.

This was in stark contrast to older Australians who are thriving under the cost of living crunch, with those aged over 70 the only cohort to have increased their spending at a pace greater than the rate of inflation, which was up 5.4 per cent in the most recent quarter.

Originally published as Record super benefits driving consumption, inflation as RBA warns about further rate hikes