Lower interest rates are hurting older Australians... and the RBA's attempt to boost household consumption

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Australian economic growth is, and is likely to remain, below-trend for many years ahead.

A raft of interest rate cuts from the RBA, something that had helped boost asset prices and lower the Australian dollar has, as yet, had a limited impact on boosting household consumption.

ANZ, in a research note released over the weekend, have looked into why lower interest rates and higher asset prices have yet to create a meaningful boost to consumption, something that the RBA are looking to encourage to help offset the economic drag stemming from the winding down of the mining boom.

The bank suggests that increased savings from older Australians may be one factor that is hampering the RBA’s efforts to stimulate the economy with lower interest rates and potential changes to superannuation policy reinforcing cautious behaviour amidst wealth rebuilding rather than increased levels of consumption.

Here’s the ANZ on the conundrum currently facing the RBA as a consequence of caution being expressed by older households.

“As the mining construction boom unwinds and the economy muddles through a prolonged slowdown, interest rates look to be on hold for an extended period. Rate cuts so far in this cycle have been effective at boosting (some) asset prices and assisting aggregate demand, but the impact on consumption is softer than history might have suggested.

We hypothesise that monetary policy has been less effective at boosting consumption than in previous cycles, due in part to more cautious older households (where there is at least one member over the age of 55). With the proportion of households with at least one member aged over 65 expected to rise sharply over the next 15 years, trends in saving among older Australians could have a greater impact on the efficacy of monetary policy in future”.

The chart below, supplied by ANZ, shows how the number of older households in Australia is expected to increase sharply over the next 15 years.

By 2029-30, the number of households with at least one member over the age of 65 is expected to increase to just under 30%.

While the number of older households is growing, the retirement income derived from this group has been negatively impacted by lower interest rates, reducing the likelihood for higher levels of consumption.

As the chart below shows, in 2011-12, all other household groups besides those over the age of 65 have benefited from lower interest rates as a consequence of being net borrowers. Those over 65, as net interest receivers, have not.

As a result of lower levels of income, older households, like most in Australia, have looked to boost savings in an attempt to mitigate lower levels of income.

Not only have lower rates reduced the income for older households, from 2003-04 to 2011-12, older households also experienced the largest losses, largely as a result of the GFC.

As ANZ point out, the losses experienced over this period have been partially or fully reversed among this group as a result of increased share prices and higher house prices, particularly for those who own their home outright in Sydney and Melbourne.

Still, despite the rebound in paper wealth seen in recent years, the conundrum remains how to reduce the inclination of older households to rebuild wealth rather than increase consumption.

With many expecting interest rates to remain at historic lows, or go even lower, in the years ahead, it’s likely that consumption patterns of older households will also remain subdued in the years ahead.

Policy to help older Australians unlock the increase in their paper wealth, without having to sell entire assets in the process, looks the most likely scenario to break the current cycle.

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