The Mortgage Debt Channel of Monetary Policy When Mortgages Are Liquid
When the Reserve Bank of Australia raised interest rates by 4.25 percentage points in 2022–23, many anticipated a significant slowdown in household spending. Australians hold some of the highest mortgage debt levels globally, with most borrowing at variable rates that adjust quickly after policy changes. However, consumer spending hardly changed—the expected “mortgage cliff” did not materialize.
Research Insights from Bank Transaction Data
This e61 working paper analyzes aggregated, consented, and de-identified bank transaction data to compare households with variable-rate and fixed-rate mortgages during the 2022–23 monetary tightening cycle. Despite facing higher repayments—about $14,000 more over 18 months—variable-rate borrowers did not reduce spending compared to fixed-rate borrowers.
“Around 70 per cent of the increase in repayments was met by drawing down on pandemic-era savings in offset and redraw accounts.”
These savings buffers have softened the usual cash flow impact of monetary policy changes.
Implications of Australia's Flexible Mortgage System
The financial resilience provided by these buffers may now also reduce the expected boost from future rate cuts. Australia’s mortgage system, with its redraw and offset accounts, is unique globally. These “hidden shock absorbers” can significantly influence the timing and strength of monetary policy effects on the economy.
Authors: Pelin Akyol, Rose Khattar, and Ali Vergili
e61 Institute acknowledges the Traditional Custodians of the land on which we meet and work.
Summary: The unique liquidity of Australian mortgages, supported by pandemic savings, has buffered households from rate hikes and may blunt the impact of future monetary policy shifts.