Australian households are ramping up spending despite diminishing hopes of rate cuts, setting a challenge for the Reserve Bank to bring inflation under control.
Consumer sentiment figures, released by Westpac and the Melbourne Institute on Tuesday, will provide an insight into how long the recent rally in household spending is likely to last.
Spending through the year to November surged to 6.3 per cent – the highest annual pace in more than two years – the Australian Bureau of Statistics reported on Monday.
The strong spending result increased the likelihood of inflation bouncing back up from its recent fall to 3.4 per cent, VanEck Head of Investments and Capital Markets Russel Chesler said.
“Inflation remains elevated, and between government energy rebates rolling off, higher tariffs flowing through to consumer prices, and geopolitical conflicts impacting major supply chains – not to mention the stickiness of services and housing inflation – keeping it on a tight leash this year will not be straightforward,” he said.
“Which means that it is likely that the RBA will need to increase the cash rate this year.”
However, there is a strong chance the momentum will run out when December spending figures are reported in February.
The Westpac-Melbourne Institute Consumer Sentiment index, which provides a rough forward indicator of spending momentum, slumped nine per cent in December to 94.5 after Reserve Bank governor Michele Bullock’s hawkish warnings about rate hikes in 2026.
A further drop into pessimistic territory should ease concerns that runaway spending will over-inflate the economy.
NAB chief executive Andrew Irvine said he remained optimistic about the prospects for Australia’s economy this year.
He said finding ways to boost productivity would be essential to growing the economy.
“Backed by strong employment, the economy continues to do well, and we don’t expect more stimulus or another rate cut right now,” Mr Irvine said.
“The question for the Reserve Bank is going to be: does it need to put a little bit of a handbrake on that growth?
“The challenge is that we don’t have any excess capacity.”
Mr Irvine said Australia needed to change its aversion to business risk to foster innovation and competitiveness.
“Bankruptcy in Australia is still viewed as failure by many,” he said.
“In the US, failure is almost seen as a rite of passage and many entrepreneurs have failed twice or more.
“In Australia, we don’t have as much venture capital and banks don’t do much growth lending due to our risk settings.
“More incentives to help businesses to start and grow are also needed.”
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