If the Reserve Bank cuts interest rates again, would the impact be positive on the economy? It is an interesting question and one that the Reserve Bank probably didn’t think that it would ever need to contemplate.
But Aussie consumers are shunning debt, even with historically low interest rates. And with the value of term and other deposits exceeding the value of owner-occupier home loans, a rate cut may cause more disappointment by investors than joy by borrowers.
Aussie consumers continue to pare back debt at a record rate. In fact data from the Commonwealth Bank indicates that 60 per cent of credit card customers now pay off their outstanding debt in full by the due date, avoiding charges.
Consumers are living within their means and prefer to use their own money to make purchases than put it on credit. It is possible that if interest rates were slashed over 2013 that consumers would become more fearful than confident, perhaps cutting debt by an even greater magnitude.
The home loan data covers the month of November but given that so much has happened since, the data is probably more in the realm of ancient history. The Reserve Bank cut interest rates in December and the mood has become decidedly more upbeat in the early weeks of 2013.
Figures released from the Reserve Bank show that the average credit card balance recorded a seasonal increase in November (first increase in five months), lifting by $27.10 (0.8 per cent) to $3,262.60. The result follows a $14.80 (0.5 per cent) fall in October, $11.70 (0.4 per cent) decline in September, $35.90 (1.1 per cent) decline in August and $70.10 (2.1 per cent) fall in July.
- The average credit card balance is down a record 2.3 per cent on a year earlier and is thus continuing to fall in real terms.
- In smoothed terms (12-month average) the average credit card balance is up 0.3 per cent on a year ago – the slowest growth on record.
- The number of credit card accounts rose by just 1.3 per cent over the year to November to 15.18 million. The number of credit card accounts without an interest-free period hit a record low of 320,000 in November, down 5.9 per cent over the year. The number of debit cards rose by 6.6 per cent in the year to November to 36.00 million.
- Of credit cards attracting interest charges, the average outstanding balance fell by $39.60 to $2,321.90. The average balance accruing interest is down 4.2 per cent on a year ago. In smoothed terms (12-month average) the average credit card balance accruing interest is down 0.8 per cent on a year ago – the slowest growth on record.
- The average credit card limit fell by $8.30 to $9,144.90 in November. The average credit card limit rose by just 1.7 per cent in the year to November – the slowest growth in 18 years.
- The number of credit card cash advances fell by 7.4 per cent in November after surprisingly rising by 16.5 per cent in October (value fell by 6.4 per cent after a 14.1 per cent lift in October). In smoothed terms, credit card advances are down 4.9 per cent on a year ago and have consistently fallen in the past five years.
- Purchases made with credit cards fell by 3.5 per cent in November after rising by 17.1 per cent in October and slumping by 8.1 per cent in September. In smoothed annual terms credit card purchases were up 4.9 per cent on a year ago. Purchases made with debit cards were up 17.3 per cent on a year ago (in smoothed terms up 16.6 per cent).
- Cash-out only transactions with debit cards were up by a record 45.1 per cent on a year earlier in November after a 40.7 per cent annual gain to October.
What are the implications for interest rates and investors?
We believe that the Reserve Bank will leave interest rate settings on hold in the next few months to determine the impact of the December rate cut and lift in the mood on financial markets in early 2013.
Consumers continue to cut credit card debt, preferring to use their own funds instead to make purchases. Banks, retailers and consumer-focused businesses more generally need to work through the implications.