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The Reserve Bank of Australia (RBA) may be nearing the end of its interest rate hiking cycle, but the Australian economy is already feeling the effects.

The CommBank Household Spending Insights Index found that Australians are spending less as higher borrowing costs eat into household budgets. While the index recorded a modest uptick of 0.7 per cent in household consumption last month, the annual growth rate in spending remains far below its recent peak.

This slowdown in spending growth coincides with the RBA’s series of rate increases.

Spending patterns vary across Australia, with Queensland leading the pack. the Northern state boasted the strongest monthly spending growth in August, with a 1.5 per cent increase, followed by Tasmania (1.3 per cent) and the Australian Capital Territory (1.1 per cent). However, the annual spending growth story tells a different tale, with Western Australia (4.7 per cent) and South Australia (4.5 per cent) topping the list.

On the flipside, Victoria has seen the weakest spending growth, with year-on-year figures remaining stagnant and the state showing only a marginal rise in August (0.4 per cent).

The recent surge in spending was attributed to a combination of factors, including international students returning to Australia, higher petrol prices, and the excitement surrounding the FIFA World Cup overall contributing to a 2.3 per cent boost in household spending.

One notable area of spending increase was education, which saw a significant uptick of 2.8 per cent, thanks to record immigration levels. The annual rate of education spending accelerated to a staggering 14.7 per cent, up from 9 per cent in July.

Recreation spending also posted strong growth, rising by 1.9 per cent and 8.4 per cent annually. This increase came on the back of the FIFA tournament and several high-profile concert tours.

While spending in categories like motor vehicles, health, and insurance showed increases, they were offset by weaker performance in hospitality and utilities spending. This decrease in hospitality and utilities spending was partly due to government rebates aimed at alleviating rising energy bills.

CBA Chief Economist Stephen Halmarick said there are concerns over the significant slowdown in annual household spending growth. He said that the impact of the RBA’s interest rate hikes, which amounted to a total of 400 basis points, was evident in the deceleration of spending growth.

“With the RBA holding rates since June, our view is that the hiking cycle is now at an end,” Mr Halmarick said.

Mr Halmarick stated he anticipates a further reduction in spending over the next year, citing the restrictive nature of current monetary policy and the tightening financial conditions as a result of the lagged effect of RBA rate hikes and mortgage refinancing.

“We continue to expect household spending to weaken further over the remainder of 2023 and into 2024,” he said.

Despite the overall slowdown in spending, there is some optimism in the housing market. The CommBank Home Buying Index recorded a 0.6 per cent increase in August, following a 2.1 per cent gain in July. However, the annual Home Buying Index figures have declined, dropping to -13 per cent in August from -9 per cent in July.

Mr Halmarick explained that while there will be a lagging effect from previous RBA rate hikes, the belief that interest rates have peaked in Australia will likely support home-buying activity in the coming months. However, this activity may be constrained by a limited supply of available housing. He forecasts a 7 per cent rise in dwelling prices in 2023, with an additional 5 per cent increase expected in 2024.