Australian borrowers have been warned the end of interest rate cuts may be near as a surge in household spending heats up the economy.
A surprise jump in economic growth, revealed by the Australian Bureau of Statistics on Wednesday, was followed by strong household spending data, indicating tax cuts, falling interest rates and rising real wages were helping consumers.
Reserve Bank of Australia governor Michele Bullock insisted she did not know “at this stage” what the uplift in economic growth could mean for interest rates.
“But it does mean that it’s possible that if it keeps going, then there may not be many interest rate declines left to come,” she said.
Ms Bullock issued her warning following an address on the impact new technology would have on the economy she delivered to the Shann Memorial Lecture in Perth on Wednesday evening.
EY chief economist Cherelle Murphy said the RBA previously noted there was a risk rising household spending could reignite inflation pressures as real incomes and wealth rose.
Household spending was 5.1 per cent higher over the year to July – the largest increase since November 2023 – the ABS revealed on Thursday.
A 0.5 per cent jump over the month was driven by strong growth in spending on services, including on health, hotels, air travel and dining out, although spending on goods fell after mid-year discounting boosted June sales.
“Today’s strong result and the solid consumer data in the June quarter National Accounts will be reason for the Reserve Bank to reconsider how quickly the consumer is adding demand back into the economy,” Ms Murphy said.
The solid rebound in consumption growth put Australia in good stead for the global uncertainty and big economic challenges ahead, Treasurer Jim Chalmers said in question time.
The monthly spending data reinforced market expectations the RBA would hold rates in September, after the nation’s economic growth rate jumped from 1.4 to 1.8 per cent on an annual basis in June, said CommSec chief economist Ryan Felsman.
Money markets had been fully pricing in a November cut before the GDP release, but lowered the odds to 80 per cent following Ms Bullock’s speech.
In welcome news, productivity as measured by GDP per hour worked climbed 0.3 per cent over the quarter to be 0.2 per cent higher over the year.
That is still below Australia’s historical average, limiting the nation’s maximum growth potential.
The RBA in August downgraded its assumption for medium-term productivity growth to 0.7 per cent, which mechanically lowered Australia’s GDP growth potential to two per cent a year.
Without an increase in productivity growth to about 1.5 per cent, inflation would struggle to stay in the RBA’s two-to-three per cent target band over time, Mr Felsman said.
Business investment fell 0.4 per cent over the quarter, although that was partly explained by the completion of some large mining and renewable energy construction projects.
Adoption of productivity-boosting AI technology surged, with investment in intellectual property up 1.9 per cent.
HSBC chief economist Paul Bloxham said the economy was operating near full capacity and it was not clear where further disinflation would come from without an upswing in business investment and productivity.
CBA is only expecting one more cut in November before the central bank calls an end to its easing cycle.
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