Commonwealth Bank of Australia (ASX: CBA) shares are up 1.22% to $132.12 apiece on Tuesday.
The ASX 200 bank stock is outperforming the S&P/ASX 200 Index (ASX: XJO), which is up 0.12%.
Following last week's decision by the Reserve Bank (RBA) to keep interest rates on hold, RBA Governor Michele Bullock indicated that a rate cut over the next six months was unlikely.
At a press conference, Bullock said:
So based on what I know today and what the Board knows today, what we can say is that a near-term reduction in the cash rate doesn't align with the Board's current thinking.
She later clarified that 'near team' meant "by the end of the year and the next six months".
Despite this, CBA has held firm with its long-standing prediction of an interest rate cut in November. It expects the official cash rate to be reduced by a total of 125 basis points by the end of 2025.
However, CBA acknowledges that "the risk sits with a later start date to rate reductions".
CBA head economist Gareth Aird has issued a note explaining why CBA still expects a rate cut in November.
One reason is the draining of pandemic savings from Australians' bank accounts as they battle today's higher cost of living.
As the savings run out, more people are likely to reduce spending, thereby impacting economic growth.
CBA shares higher on Tuesday amid savings warning
CBA estimates that general pandemic savings, which exclude savings held in mortgage redraw or home loan offset accounts, will be largely exhausted by the end of this year.
Household savings reached a historical peak during the pandemic. According to the Australian Bureau of Statistics (ABS), the household saving ratio surged to a high of 24% of income in the 4Q FY20 quarter.
Household savings were "extraordinary" because of lower spending during lockdowns, generous stimulus payouts, and emergency low interest rates, which reduced monthly mortgage repayments.
CBA estimates that pandemic savings totalled about $300 billion and peaked in 3Q FY22. The bank says about $220 billion was kept in general savings, and $80 billion went into redraw and offset accounts.
About $140 billion of the $220 billion has been drawn down. CBA reckons the rest will be gone by year's end.
But what about the savings in offset and redraw accounts? CBA says that is unlikely to be touched. In fact, the bank notes that these savings are still increasing today.
Aird explains:
The large increase in the average outstanding mortgage rate due to RBA interest rate hikes increases the incentive for households to preserve buffers built up in offset and redraw facilities.
The opportunity cost of spending money in offset and redraw facilities is the tax-adjusted return derived from the mortgage rate. The higher the mortgage rate, the greater the incentive households with mortgage buffers have to save rather than spend.
With all of this in mind, Aird and his team think the RBA has "underappreciated the impact that the savings drawdown has played in supporting household consumption since the economy reopened".
He explained further:
As a result, we believe the RBA is overestimating the extent to which Stage 3 tax cuts will push spending higher given the savings drawdown will be essentially over by the end of the year.
In conclusion, CBA expects continuing below-trend consumer spending growth until the RBA cuts rates.
As we've reported, David Rumbens of Deloitte Access Economics reckons pandemic savings significantly contributed to the retail sector's relative resilience in FY24, with ASX retail shares rising strongly by 19%.
What's the latest news with CBA?
CBA shares hit an all-time record high of $138.24 apiece on 1 August.
The bank's incredible share price growth since November 2023 saw it overtake BHP Group Ltd (ASX: BHP) as the largest company on the ASX 200 last month.
At the time of writing, CBA has a market capitalisation of $221.23 billion.
