RBA watching cash-rich household spending amid recovering economy

One of the stand-out features of the past year has been the large increase in household saving, Dr Philip Lowe, the RBA governor advised in a speech today. He noted that last June the saving rate spiked to 22 per cent, the highest level on record. "This increase in saving reflected the combination of: the boost to incomes from government support; the limited opportunities to spend; and households feeling uncertain about the future," he said. While the saving rate has since declined as restrictions have been eased, it remains high by historical standards, Dr Lowe added. "The fact that households have saved more means that, in aggregate, household balance sheets are in better shape than they were previously." He added household balance sheets have also been affected by the recent rise in housing prices. "This rise has been a nationwide development, but was first seen in parts of regional Australia, with price gains in many areas outstripping those in the capital cities. "Global factors, including low interest rates, have played a role here. "But there has also been strong demand for properties in regional Australia due to people moving out of the capital cities and fewer people leaving regional areas during the pandemic. "The effects of this are evident not just in prices but in rental markets too, with rents rising quickly in many regional centres." Dr Lowe said he would be watching how households respond to these changes in their balance sheets as it will shape the next stage of the recovery. "If households were to run down their additional savings quickly or if higher housing prices spurred more spending than usual, a stronger economic path than the one we have envisaged could eventuate. "On the other hand, it is possible that households sit on these extra savings for a long time and restrain their spending because of uncertainty about the future. "If so, this would slow the recovery. So this is an issue we are watching carefully." It was also noting that the rise in housing prices was encouraging more housing construction. "The challenge here is to make sure that planning processes are sufficiently flexible to allow the supply side of the market to respond to the extra demand; regional centres should be better placed on this front than capital cities, although this is not always the case. "A related challenge is to find the workers to build the new housing in regional Australia." The RBA has also been paying close attention to is the increase in household borrowing. "The RBA does not, and should not, target housing prices," he reaffirmed. "We do though have a strong interest in trends in household borrowing, especially given the already high level of household debt in Australia. "It is important that lending standards remain sound in an environment of low interest rates and rising housing prices. "At its meeting last week, the Council of Financial Regulators also discussed the risks that could arise if growth in household borrowing substantially outpaced growth in household income. "This is not the case at the moment, but the Council did discuss possible policy responses to a scenario in which rapid growth in household debt posed heightened risks to the future stability of the economy." Dr Lowe said the central bank will not increase the cash rate until inflation is sustainably within the 2–3 per cent target range. He noted year-ended CPI inflation will temporarily spike in the June quarter to around 3½ per cent due to the unwinding of some pandemic-related price reductions. "There have also been price increases for some items due to pandemic-related interruptions to supply. "But beyond this, inflation pressures remain subdued and are likely to remain so. "For inflation to be sustainably in the 2–3 per cent range, wage increases will need to be materially higher than they have been recently. "Partly for the reasons I talked about earlier, this still seems some way off," he concluded.