Australian consumer spending stays firm in July, fuelling rate hike bets

Australian household spending climbed for a third consecutive month in July, fresh data showed on Thursday, signalling that consumer demand remains resilient despite elevated borrowing costs. The monthly household spending indicator rose 1.1% to A$82.34 billion, defying analyst expectations of a pullback after June's solid 1% gain.

The annual pace of spending growth accelerated to 7% in July, the fastest since June 2023. The strength was broad-based, with recreation and cultural spending up 1.5% on the back of increased gambling activity, major sporting events, and cinema attendance. Clothing and footwear outlays rose 1.6%, while furnishing and household equipment posted a modest 0.4% gain.

The resilient spending picture comes on the heels of a hotter-than-expected inflation report, prompting markets to reassess the Reserve Bank of Australia's next move. Futures now price in a 47% probability of a rate hike at next month's policy meeting, with a move by December fully priced in. The Australian dollar firmed 0.2% to $0.7184, while three-year government bond futures extended earlier losses.

"The ongoing strength in household spending will be cause for concern for the RBA," said Harry McAuley, an economist at Oxford Economics Australia. "Today's strong spending growth and yesterday's stubborn underlying inflation print will do very little to improve the mood."

The central bank has already raised rates three times this year to 4.35%, unwinding all of the easing delivered in 2025, and has warned that further tightening could follow if inflation risks materialise. Three of Australia's four major banks have now abandoned their earlier calls for rates to stay on hold, instead forecasting a fourth hike this year.

Policymakers are also watching the housing market for signs that falling prices could dampen consumption through the wealth effect, though there has been no evidence yet of a sharp slowdown in spending.