Consumer sentiment falls 2.5% after rate hikes

The Reserve Bank of Australia’s decision to raise interest rates over two consecutive months has caused consumer sentiment to fall by 2.5% during October to November, new figures have revealed.

However, Westpac chief economist Bill Evans said the drop can only be classified as “moderate” compared to previous periods of rate increases, and advises another interest rate rise next month should be expected.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2.5% from 121.4 points to 118.3 during the period from October to November, but the index still remains 38.8% higher than the same time 12 months ago.

Additionally, the average reading of the index over the past quarter has only been exceeded by four previous periods since 1975, according to Evans, who also said the 0.8% fall since the September rate rise is similar to previous trends.

“This is broadly comparable to the 0.7% fall we saw in response to the beginning of the last rate hike cycle when the Bank raised rates by 0.25% in both May and June
2002. In contrast the Index fell by 5.2% following the consecutive increases in November and December 2003.”

“It seems reasonable that the level of rates is the dominant factor in determining households’ responses to rate hikes. The 5.2% fall in the Index in 2003 followed the increase in the standard variable mortgage rate from 6.55% to 7.05%. The recent increases in the standard variable mortgage rate have seen it increase from 5.8% to 6.3%.”

And despite the drop in sentiment approaching Christmas, Evans said the Reserve Bank is expected to raise interest rates by another 25 basis points at its December meeting.

“Our survey will indicate to the Bank that we have probably now reached the point in the rate hike cycle when households will become increasingly sensitive to higher rates.”

“However, confidence is still at remarkably high levels and the Bank is likely to take the opportunity to gradually remove more of the stimulus. Today’s results do, however, signal that the extent of rate hikes in 2010 envisaged by current market pricing is unlikely to transpire.”

But despite the drop in confidence, there was good news for retailers preparing for Christmas as opinions on “whether now is a good time to buy a major household item” are up by 58% from a year ago.

However, all components of the index dropped during November, with expectations for family finances falling 4%, economic conditions for the next year down 2.5% and economic conditions over the next five years down 3.7%.

The better performing indexes, “good time to buy major household items” and “family finances compared to a year ago” only fell by 1.2% and 0.7% respectively.

Housing sentiment fell 4%, with opinions regarding whether or not now is a good time to buy a house down by 15% over the quarter. But Evans said the figures have held up better than during previous rate rise cycles.

“That is a more resilient result than we saw in those periods of consecutive rate
hikes in 2002 and 2003 when sentiment towards housing fell by over 30% on both occasions.”