Rising interest rates are not slowing discretionary spending

We know the Reserve Bank is trying to slow inflation by raising interest rates.

But will this really work?

For almost a decade the RBA has been trying to increase inflation to within its preferred band of 2-3%with low interest rates but that didn't work, did it.

And now, despite rising rates and falling consumer confidence, it seems Aussies are still happy spending, rather than stashing their cash.

ANZ-observed spending excluding petrol was steady in early August (down just 0.7% compared to the last week of July) and seems to be following a similar seasonal pattern as previous years.

Discretionary spending remains resilient

Most key categories of discretionary spending are resilient despite recession-level consumer confidence and falling real wages.

Encouragingly, discretionary categories that involve larger-scale purchases, which could be the first to go under any retreat by consumers, are resilient.

Furniture spending was up 22% year on year and weekly travel agent spending (generally used for larger trips) has doubled since February to 70% of the 2019 weekly average, a record since COVID began.

Spending on smaller-scale discretionary items was stable, though there was weakness in entertainment and accommodation spending in early August, plus a slightly steeper seasonal down-tick in clothing spending.

This may reflect a compositional shift towards international travel spending, which is not fully captured in the ANZ data.

It could also be an early sign of a pullback.

Dining, department store, and electronics spending all showed similar seasonal patterns as in 2019.

In a recent report ANZ Bank economist Adelaide Timbrell said:

We do not expect any immediate cliff in household spending due to interest rate rises, though we will be watching the data for signs of weakness.

The very strong labour market is protecting against household income shocks, and RBA research suggests households are still adding to COVID savings buffers.

Our recent report shows that New Zealand household spending remained solid despite interest rate rises over the last seven months, which is another encouraging sign for Australia’s household spending.

About Robert Chandra Robert Chandra is a Property Strategist at Metropole and has an intrinsic understanding of property markets backed by many years of real estate experience. This coupled with several degrees gives him a holistic perspective with which he can diagnose clients’ circumstances and goals and formulate strategies to bridge the gap.