Consumer sentiment jumps in August as interest rates remain steady

Consumer sentiment rallied by 5.4% in August, prompted by the Reserve Bank’s decision to keep interest rates at 4.5% after lower than-expected inflation data was released in late July.

But Westpac economist Bill Evans also points out the survey is an early indicator the interest rate rises announced earlier this year are now starting to lose their effect on home owners, meaning rates could increase by the end of the year.

Evans said in a statement the reading is a “very strong result”. The figure shows consumer sentiment rose from 113.1 in July to 119.2 in August.

“After tumbling by 15% in the wake of three consecutive rate hikes in March, April and May the Index has now recovered by 17% in the last two months. It is now back to around the level it reached at the beginning of this year and the level we saw prior to the beginning of the rate hike cycle in September last year.”

“Clearly the most important factor was the decision by the Reserve Bank to keep its overnight cash rate steady in August. There had been intense media speculation about a rate hike and we certainly assessed that a likely high read for inflation in the June quarter would have resulted in a rate hike.”

Evans backs this up by pointing to a survey result which reveals a 10.2% increase in confidence for homeowners, compared to a 0.9% reduction in confidence for those who own their property outright.

The strong labour market was also a significant player here, with a total of 45,900 new jobs added in June and a static unemployment rate of 5.1%. Petrol prices fell by 2.6%, and the Australian dollar rose by 4.6% against the US dollar.

And in good news for retailers, the survey shows that consumers’ opinion on “whether now is a good time to buy major household items” recorded a 3.5% increase and is now at its highest level since 2007.

“This bodes well for retailers as we head into the Christmas sales season,” Evans said.

Sentiment over whether now is a good time to purchase a house or motor vehicle increased, with those indexes rising by 9.1% and 7.5% respectively. This result also comes as property analysts suggest prices will stagnate over the next six months as more listings come onto the market.

“All components of the Consumer Sentiment Index increased in August. The assessment of family finances versus a year ago rose a further 5.7% after rebounding sharply in July from a June slump.”

“Expectations for family finances over the next 12 months also posted a solid 6.1% rise. Sentiment on the economic outlook – which has been notably stronger than views on family finances in recent months – also improved in August with an 8.6% rise in expectations for the next 12 months probably reflecting the reduced threat of follow-on interest rate rises this year.”

Looking ahead, Evans said a rate rise on September 7 is unlikely. Inflation is low, the housing market is tapering off from a year of heavy growth and retail sales are still subdued – but the good times might not last for long.

“This survey is an early signal that the effects of the series of rate hikes on households may be starting to wane. In the absence of any major new disturbances from the global economy further evidence of steady rates should start to see a firming of housing and consumer spending through the second half of 2010.”

“By 2011, a more confident consumer; improving housing market and a lower unemployment rate should see a resumption of the tightening cycle.”