CHART: Australian households are obeying the RBA and spending more and saving less

RBA boss Glenn Stevens. Digital mischief: Peter Farquhar

One way monetary policy works is that when rates fall it leaves more cash in consumer pockets and those pulling the policy levers hope that extra cash will circulate through the economy via spending.

RBA governor Glenn Stevens reiterated this in a speech to the American Australian Association in New York on April 21.

He said that the Australian economy need households to lower their savings and increase spending. But he was also worried because household leverage is “starting from a high level”, pondering whether the monetary transmission mechanism might be less effective now than it was in the past.

“Monetary policy’s ability to support demand by inducing households to bring forward spending that would otherwise be done in future might well turn out to be weaker than it used to be,” he said.

No doubt then he will be pleased that the Q1 2015 GDP data released this morning shows the Australian household savings rate has hit its lowest level since the start of the GFC in the September 2008 quarter.

After mining household consumption expenditure was, with inventories, the second biggest contributor to growth during the quarter with a contribution of 0.3%. This disappointed some, but even before the big bounce in confidence after the recent federal budget, the fall in the savings rate suggests consumers are feeling a little better about the future and have listened to the signals from the RBA and are starting to spend more.

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