Household spending is slowing rather than slumping, according to the Reserve Bank, and its August forecasts mapped out a modest path for consumption over the next two years.

Household spending is the engine room of the Australian economy, and how fast it runs shapes everything from retail trade to inflation. So the Reserve Bank of Australia's description of where consumers are heading deserves attention.

In its 29 September statement, the Monetary Policy Board said consumer spending is easing gradually. It was a measured phrase, chosen on the day the Board lifted the cash rate target by 25 basis points to 4.60 per cent, its fourth rise of 2026.

The word "gradually" matters, and it is worth unpacking. The RBA is not describing a collapse in spending, nor a boom. It is describing households steadily tightening their belts as higher interest rates, elevated prices and a softer housing market weigh on budgets.

The forecast path

The August Statement on Monetary Policy set out the RBA's expected trajectory for household consumption, measured as year-ended growth:

  • 1.8 per cent in June 2026
  • 1.6 per cent in December 2026
  • 1.6 per cent in June 2027
  • 1.8 per cent in December 2027
  • 1.9 per cent in June 2028 and December 2028

That is a picture of spending that dips to around 1.6 per cent through late 2026 and the first half of 2027, then gradually recovers. It sits alongside forecast GDP growth of 1.4 per cent in December 2026 and 1.5 per cent in June 2027.

An important caveat: these forecasts were prepared in August with a cash rate assumption of around 4.3–4.5 per cent. They pre-date the September hike, so they do not reflect the higher cash rate now in place.

What is weighing on households

Several pressures are bearing down on household budgets at once.

Mortgage repayments. At her 29 September media conference, Governor Michele Bullock said mortgage payments were "back up sort of around 10 per cent of" disposable income, by her approximation. Compared with "when we had interest rates at 4.35 per cent", she said, "they'll go up a bit further." The RBA's October Financial Stability Review noted that "Scheduled mortgage payments have been the largest claim on household income".

Prices. Headline inflation, measured by the monthly CPI indicator, was 4.0 per cent over the year to August. Over the year to the June quarter, headline CPI was 3.9 per cent and trimmed mean, the RBA's preferred underlying measure, was 3.6 per cent. Bullock put underlying inflation at "about 3.5 per cent", around a percentage point above the 2.5 per cent midpoint of the 2–3 per cent target range. Rising prices erode what households can buy with their income.

Energy and global shocks. Bullock said "the Middle East conflict has been a big shock, and it's made us all poorer in this country," noting that "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher."

Housing. The Board said housing prices have fallen in most capital cities and new housing loans have declined noticeably.

The Governor acknowledged the strain directly. "I know they don't understand why we have to do this and it hurts them," she said.

Why the RBA wants spending to cool

From the RBA's perspective, a gradual easing in consumption is part of how monetary policy is supposed to work. Higher interest rates reduce the amount households have left to spend, which in turn eases pressure on prices.

"Inflation is too high and has been driven by domestic capacity pressures," Bullock said. When demand runs ahead of what the economy can supply, slowing spending is one way to rebalance. The Board judged that "a further tightening of financial conditions" was warranted to return inflation to target within a reasonable period.

The Governor also stressed that the full effect of earlier rises has not yet been felt. "A lot of that effect is still to flow through," she said, with policy taking "12, perhaps even 18 months" to work through.

Buffers that cushion the slowdown

If spending is easing only gradually, part of the reason may be that many households entered this period with savings buffers.

The October Financial Stability Review found that the median borrower is able to cover over a year of scheduled mortgage payments from offset and redraw buffers. Bullock also highlighted offset accounts at her media conference: "a lot of people have a mortgage, and then they have an offset account, which sits in the background." She said "the amount of money in those offset accounts has actually grown quite a lot over the last decade or so."

The review also found that the share of variable-rate owner-occupier borrowers with a cash-flow shortfall "remains relatively low at around 2 per cent". Most mortgage households are well placed to cope even with a sharp fall in house prices, the RBA said, though there are some pockets of stress.

The labour market matters too. Bullock noted that "the unemployment rate has risen from 3.5 per cent over the past couple of years to 4.6 per cent", but said "there's been over a million jobs created" and that a higher unemployment rate "doesn't mean job losses." Continued employment supports household incomes and helps explain why spending is slowing rather than falling sharply. The August forecasts had employment growing by 1.4 per cent over the year to December 2026, even as the unemployment rate drifted higher to 4.5 per cent, then 4.6 per cent by June 2027. The latter figure has already been reached.

Not every sector is sharing the load equally. The review noted that business insolvencies "remain elevated in some industries, particularly hospitality, construction and transport".

The outlook for rates is open. "I'm not going to give you forward guidance," Bullock said. The next CPI release is on 28 October and the next decision at 2.30 pm on 3 November.

The bottom line

The RBA's forecasts point to household consumption growth of around 1.6 per cent through late 2026 and into 2027, before a gradual pick-up, though those projections pre-date September's hike. The Board describes spending as easing gradually, reflecting higher repayments, elevated prices and a cooling housing market, while savings buffers and a still-solid labour market help cushion the slowdown. For the RBA, that measured cooling in demand is part of how it aims to bring inflation back to target.