Senate Economics Legislation Committee, , 3:34:54 to 3:41:34
Examination of how interest rate increases affect household discretionary spending and cash flow constraints.
Topics: Employment, Social services
Speakers: Michele Bullock, Senator Fatima Payman, Dr Sarah Hunter, Dr Brad Jones
Senator Payman. Thank you, Chair. Um good afternoon. Um I've just got a few premises that I'd like uh some confirmation around. Um Governor, the cash rate cannot produce more oil, resolve an overseas conflict or repair an international supply chain, correct?
Uh correct.
So when inflation is caused by those factors, increasing the cash rate does not remove the source of the price increase, correct?
Um yes, but the point is here, and I'm going to preempt you. The point is here that the inflation problem in Australia is not solely due to the fuel price issue and the conflict in the Middle East. It's due to the fact that our demand for goods and services in Australia is running ahead of the ability of the economy to supply those goods and services. That's why we started raising interest rates before the fuel price um uh went up. Um, and it still remains the problem that we have demand, domestic demand is higher than domestic supply.
I understand, but what I'm hearing from constituents is in situations like that, the bank responds by taking spending away, spending power away from Australian households until demand elsewhere in the economy falls. Is that a correct observation?
The way I described it earlier, Senator, was that a supply shock like this, particularly the oil supply shop, it worsens the trade-off between inflation and economic growth in some sense. So now, do if it's a supply shop, you're quite right. The interest rate here does nothing about that particular supply shop, but it does two one important thing it does is if we think that it's going to find its way into inflation expectations and therefore get ingrained in the economy, then we have to respond. Um earlier, uh Dr. Kent noted that inflation expectations have remained remarkably anchored, and that's partly because markets expect that central banks around the world will respond in an appropriate way to make sure inflation doesn't get ingrained at a high level in the economy.
Okay, my focus is on how this impacts households. So, how many Australian households does the RBA estimate have already exhausted their discretionary spending and have nothing meaningful left to cut? Can you provide us a number, please?
Um I don't think we have that number. We do have some numbers on the number of people we think uh in cash flow constrained. Yeah. So Brad, you can talk to that.
Yeah, the the best visibility we've got here, Senator, is over um Australians who have taken out a mortgage. And on those numbers, so this here we're talking a little more than a half of uh a third of the population. Uh our numbers suggest that uh only around 2% of households are in or close to what we call a negative cash flow, spare cash flow position where they've got basically less cash flow than they do essential uh oblig spending obligations.
That's and so that's the numbers we've got. The problem is we have no visibility really over renters, which are the people that have less income, um, typically their lower income. Um, and I don't believe we have more visibility over renters.
So when we don't have the full picture, and obviously don't have a specific number to say how many Australian households have exhausted their discretionary spending. On what evidentiary basis does the board conclude that those households can safely withstand further rate increases?
So um monetary policy is not about looking at the extent to which individual households or groups can uh withstand increases in interest rates. As Brad's already said, um, mortgages obviously people are affected by interest rates, renters um and people on low incomes typically don't have mortgages, so they're not impacted by interest rates. They're impacted by other things, and most importantly, they are impacted by inflation. That's the thing that hurts them the most. So the best thing we can do for them is to get inflation down. Inflation affects everyone. And the interest rate, we only have one tool in our in our toolbox, and that's the interest rate. And we know that over time that what that does through a number of different um uh not just the not just the cash flow change for mortgage holders, but for every but through the economy that. Higher interest rates will slow down the growth of demand in the economy, and that will help to the extent that we are supply constrained.
Senator, you asked about evidence and data, and we don't have data as the governor and and Brad have just outlined. But what we do do through our liaison programme is talk to community organizations and other non-profits organisations that support households. And they give us uh very regular, very clear updates on the challenge that people are facing. And we do know that some people are very challenged at the moment. That's very clear. Um that's also very clear in the the kind of reports that that that sets it would put out. So we are uh able to see it in a more qualitative way, if you like, even though um there aren't the the precise numbers to track it as you've uh just asked us about. But we we are aware of those groups, and um, and as I I sort of outlined earlier, and as the the governor's just said, we are also, and yes, we're tracking it in an aggregate sense, but we are also seeing and um and observing what's happening across the whole economy. And while we can see, for example, that um household spending growth has slowed, uh we can also see that it is still growing, uh, and that more broadly the economy is not uh it doesn't look at the moment heading into a recession, and that's not our baseline forecast. So even if we don't have a precise number for some of what you're asking us about, we have ways of uh of checking and cross-checking, if you like, what's going on.
What we do have evidence on um is uh inflation. And the evidence there, as you will have seen from this morning, is it's far too high.