Consumer confidence jumps 4%, but Westpac says economy still needs rate cut

Consumer confidence rose 4.2% in February as the impact of two interest rate cuts in November and December began to feed through, though economists warn that figure is still below the reading taken at the same time last year, according to the latest Westpac-Melbourne Institute Index.

Economist Bill Evans also says the result is difficult to interpret given the survey was finished only three days after the Reserve Bank decided to keep interest rates on hold, despite media indicating a cut was all but confirmed.

Major banks then rose interest rates on mortgage and small business loans, although this occurred after the survey was taken.

Evans says the confidence of those surveyed before the rate decision was higher than those surveyed after the RBA stayed on hold.

“Compared to those received in the first two days when households were confidently led to believe that a third rate cut could be expected.”

The index rose by 4.2% to 101.1, but that is still 5.2% below the level recorded a year ago, and 13.6% below the level recorded two years ago.

However, Evans says there are still factors that support the increase. International news has improved, the dollar has risen to $US1.08c and the sharemarket has risen.

The index of how people assess family finances improved, with “family finances compared to a year ago” up 7% and “family finances over the next 12 months” up 2.6%.

The sub-indexes for views on economic conditions over the next 12 months was up 0.9%, with the “economic conditions over the next five years” index also up 9.9%.

Spending intentions have also improved, with the index for whether now is a good time to buy a major household item rose by 1.8%.

Evans also noted the seasonally unadjusted indexes for “time to buy a dwelling” and “time to buy a car” are pretty much unchanged, up just 0.5% and 1.2% respectively from October, before the RBA cut rates in November and December. The sub-indexes themselves are not seasonally adjusted.

While Evans suggests the current result is difficult to read, he believes there is still a need for the RBA to loosen its stance on Rates.

“We continue to believe that lower rates are required and the best policy response is to move earlier rather than delay,” Evans said.

“Accordingly we retain our view that a move in March is likely, while emphasising that developments in the domestic economy, particularly around the labour market, will eventually force the Bank’s hand even if they choose to defer in March.”