Money is being re-directed away from millions of Australians’ bank accounts. It’s been a long time coming.Cast your mind back to May, when the Reserve Bank raised interest rates. It was the first cash rate hike by the RBA since October 2009.The bank had to make the move. Inflation was building and the forces behind it weren’t going away.While the decision made headlines, it was largely inconsequential for households and their budgets at the time.That is, nothing happened to bank accounts that afternoon, or the next day, or the next week for that matter. Life continued as normal.Fast forward to December 2022 and four of the seven RBA cash rate increases have now been applied to monthly mortgage repayments, and the cash has been debited from millions of bank accounts across the country.To put it another way, for many, the reality of the second most aggressive monetary policy tightening cycle in the Reserve Bank’s history is now a reality for millions of households. The penny’s dropped, quite literally.The $30 billion question – which is roughly how much Australians spend per month at the shops — is how will households’ spending habits now change?The answer tells us what might happen next – whether interest rates keep climbing or the economy slows down.We’ve reached a fork in the roadBill shockBefore we go any further, let’s take a squiz at a shocking moment I suspect many Australians have endured recently.It’s that moment when you discover the majority of the Reserve Bank’s interest rate increased have now been applied to your home loan and extracted from your bank account.Take Commonwealth Bank customers, for example. They make up the single largest pool of mortgage customers under similar loan conditionsIts standard variable mortgage rate hit a record low 3.85 per cent in April, but it’s now 6.24 per cent.That’s an increase of 2.39 per cent, or as the analysts say, 239 basis points — it’s one heck of rate increase to absorb.According to RateCity, if you factor in the entire 2.75 per cent Reserve Bank rate increases, the total extra monthly repayments climb to $760 for a borrower with a $500,000, 25-year loan.Total extra monthly repayments climb to $1,140 for a borrower with a $700,000, 25-year loan.To be crystal clear, millions of Australians still paying off a mortgage, but especially those who have recently taken on a new loan, now need to find hundreds of extra dollars, and in some cases over a thousand extra dollars a month, to continue meeting their mortgage repayments.This budget impact hits roughly 60 per cent of all mortgage borrowers.A lot of Australian households are now literally looking at their expenses and trying to figure out where to cut back.One big decision: spend or save?Or are they?The Reserve Bank governor and Treasurer have long argued that low levels of unemployment and large households cash buffers mean most Australians are well placed to handle higher interest ratesAnd data from the Commonwealth Bank shows 78 per cent of CBA home loan customers are ahead on their home loan repayments. On average, customers are 36 monthly repayments (or the equivalent of three years) ahead on their mortgage repayments (including offset account balances).This is where the analysis gets murky.Households are now making decisions about whether to start using their financial buffers to help pay for the extra mortgage repayments, or keep their buffers in tact and cut back on their spending.The logic of keeping the buffer in place is straight forward – what happens when it runs out? What then?It’s impossible to know for certain right now what each individual household is doing, but their decisions will help shape the Australian economy in 2023.Inflation may be slowingOne solution to households’ financial woes is, of course, lower inflation.The RBA “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.” Them’s fighting words.And, for the first time since the bank began raising interest rates in May, signs emerged this week that inflation may be easing.The new monthly Consumer Price Index (CPI) indicator rose 6.9 per cent in the year to October 2022, according to the latest data from the Australian Bureau of Statistics.”This month’s annual movement of 6.9 per cent is lower than the 7.3 per cent movement in September, however CPI inflation remains high,” Michelle Marquardt, ABS Head of Prices Statistics, said.It’s only one month’s data though, and the monthly inflation figures from the ABS aren’t as statistically robust as the quarterly data.Natural disasters may push up the cost of food and vegetables this month and next, and there’s a risk gas and electricity prices will soar next year.But it’s something.It also coincides with other ABS data showing retail sales in October fell 0.2 per cent.And the latest figures for new home lending point to a 2.7 per cent slide. At some point, the higher cost of borrowing must reduce borrowing and spending. This appears to be happening.What happens next is keySo, will the Australian economy sink or swim?The Commonwealth Bank’s economics team says it will come down to what shoppers do over the next couple of months.”Looking beyond the next few months we expect a clear slowing in retail trade and consumer spending more generally. Rising interest rates and the roll off of ultra-low fixed rate loans over 2023 and 2024 will place significant pressure on household budgets,” the CBA says.”High inflation is also cutting into the volume of consumer spending. A slowdown in consumer spending will help reduce domestic inflationary pressures.”The National Australia Bank goes further, forecasting an abrupt economic slowdown which will last into 2024.”It is likely GDP growth will slow sharply in 2023 and 2024 as the impact of higher rates cools the economy and the rebound from COVID fades,” the NAB noted.Need more money – haggle your bankBut don’t despair, there are ways to claw some money back from the banks.RateCity suggests calling your bank or emailing your bank landing manager and asking for a reduction in your interest rate.But Research Director Sally Tindell says you have to do your homework.That is, work out your current variable interest rate, compare that rate to what other banks are offering, crunch the numbers, and work out if it’s in your interest to switch banks.Remember, it’ll cost your existing bank a lot of money long term when you switch. They know that.”Banks don’t want to lose your business. If they think you might leave, they’re likely to throw a decent discount your way. Just make sure you do your research first,” Tindell says. “The more you’re briefed up on your own home loan rate, what new customers are being offered and what you might get elsewhere in the market, the more likely they are to take you seriously.”Renters struggling to make ends meet are in a more difficult position.The Reserve Bank has noted that the majority of renters face financial stress in coming months as cost-of-living pressures remains and interest rates lift.Figures from the ACTU show 56 per cent of Australians have cut back on essential items, and 24 per cent have skipped meals due to the current cost of living crisis.That’s consistent with recent NAB data showing 20 per cent of people are missing bill payments right now.Prepare for more rate hikesThere are likely more RBA interest rate hikes to come, starting this coming Tuesday.The inflation rate has eased but it’s still too high and the Reserve Bank will need more evidence shoppers are tightening their purse strings.So, households paying off a mortgage in coming months will see hundreds more dollars being extracted from their bank accounts.If they decide to eat into their buffers to meet the repayment and spend up over Christmas, they’ll be in a worse financial position next year, inflation may remain elevated, and the RBA will keep lifting rates.Can you see where this is going?Sure, there are “supply-side” inflationary pressures, but the Reserve Bank says half of all inflation is now coming from domestic or local demand.The yet-to-be-bill-shocked Australian shopper is in a game of chicken with the Reserve Bank, but the bank has made it crystal clear it’s not budging.Spending in the economy must pull back significantly at some point. It’s an inconvenient truth.
This article was originally published by ABC News.