Rate and See: Household Interest Rate Expectation Formation in Australia

Households’ expectations for future interest rates influence their decisions and play a key role in the transmission of monetary policy, yet they remain understudied. Our paper analyses household survey microdata for Australia. Firstly, using a regression discontinuity design, we show that household interest rate expectations respond to monetary policy announcements. This finding differs from previous literature finding no effect of announcements in the United States. Secondly, we document how household interest rate expectations develop over time and differ across demographic groups. We show that household expectations differ greatly from that of market participants and professional forecasters, with the largest gaps among young people, lower-income earners, and renters. Household recall of, and attention to, economic news plays an important role in their expectations, and this differs across time and groups in a way somewhat consistent with rational inattention models.