Cash-strapped Australians saddled with most debt look to savings for protection, says RBA’s Christopher Kent

The huge rise in interest rates over the past 18 months may encourage many households to increase their savings, a senior Reserve Bank of Australia official says, even those with higher levels of debt.

Assistant governor for financial markets Christopher Kent on Wednesday said those with savings were now earning more interest, with the cash rate rising from 0.1 per cent in May last year to 4.1 per cent this year — and they may spend more in response.

He said this counterbalanced “to some degree” the widespread consumer pullback in response, with retailers reporting and figures showing a decline in spending across the board.

“(But) household debt in Australia is larger than the stock of household savings,” Dr Kent told a summit in Sydney.

“People with savings typically spend less of each extra dollar they earn than those with debt, so any additional spending associated with extra interest received is not enough to offset the reduction in spending associated with extra interest paid.

“Households with debt also have an incentive to save more: some may be able to pay down their debts ahead of schedule or at least run down their savings buffers more slowly than otherwise.”

Dr Kent said the household savings ratio nationally had only just recently dipped below pre-pandemic levels after a period well above. He said higher interest rates over the past 18 months may have contributed to slowing households running down their savings.

But he did say “many indebted households and businesses (are) experiencing a painful squeeze on their finances”.

“For households, higher interest rates provide an incentive to save more today and postpone consumption and dwelling investment until another time,” Dr Kent said.

“Our estimates suggest that the 4 percentage-point increase in the cash rate target since May 2022 will have reduced overall household spending by around 0.4 to 0.8 per cent per year.”

Dr Kent also said that since last May required household mortgage payments — which included interest and scheduled principal payments — had increased from about 7 per cent of household disposable income to almost 10 per cent.

“This is above estimates of the peak reached in 2008 when the cash rate was 7.25 per cent. And for those households with a large mortgage, required payments are a much higher share of their income,” he said.

Dr Kent said those payments would continue to rise “a little further” as pandemic-era fixed rate loans end. The share of such loans has already fallen from near 40 per cent at the start of last year to about 20 per cent today.

“Some further effects of rate increases to date are still to be felt through the economy, which will provide further impetus to lower inflation in the period ahead,” he said.

Higher cash rates pulling inflation down usually took some time to be felt, Dr Kent said, with demand growth typically slowing before a broad reduction in inflation.

But he said the past year or so had been an exception due to the sharp increase in inflation and decline reflecting problems in global supply chains now resolved or improving.

“Nevertheless, the effect of slower demand growth on inflation is now building,” he said.

“For example, we are hearing in liaison (discussions with businesses) that a range of retailers are discounting prices in the face of weak consumer spending.”