Over $50 million per month of additional retail spending could be freed up if the Reserve Bank of Australia (RBA) cut the official cash rate by just 25 basis points, new figures from RateCity show.
Damian Smith, chief executive of RateCity, said Australia’s broader economy would significantly benefit from a rate reprieve by the RBA.
“Consumer confidence is dismal across Australia – we’re seeing this impact the home loan market where the number of home buyers is at a five-year low, credit card growth has slowed and retailers are suffering,” he said.
“Two trends are absolutely clear. First, many existing mortgage holders are paying down debt faster. The RBA estimates that 50 percent of mortgage holders are paying more than the minimum required each month, and collectively, Australia’s mortgage holders are paying the minimum each month.”
Second, instead of spending, Australians are saving their money at some of the highest levels on record. There are around 2.5 million households with variable rate mortgages in Australia. Lowering the rates would give the 94.4 percent of these households who are either ahead of their repayments or paying the minimum some options, said Smith.
“If, for example, half of those households took a 25 basis point rate cut and spent that money in the broader economy – in the retail sector for example – we’d see an increase of over $55 million in retail spending,” he said.
That represents about 0.3 percent increase in spending. Total annual retail sales growth for 2011 was just 2 percent, so this would be a significant uplift.
Smith said the only way retailers would benefit from a rate cut is if they put pressure on the major banks to follow the RBA’s movements. That’s because the big four banks – ANZ, Commonwealth Bank, nab and Westpac – which collectively hold more than 80 percent of the mortgage business in Australia, have ceased following the RBA’s rate movements.
“We believe this is the biggest factor impacting consumer confidence. Australians now face an environment where they can’t predict which way their home loan rates will go, regardless of what the RBA does,” he said.
“Retailers are pressuring the RBA, but they also need to place greater pressure on major banks directly to pass on any rate cut in full.”