Start of the thaw? Consumer sentiment finally lifts as interest rate cuts kick in

Consumers have finally responded to the Reserve Bank’s cuts to official interest rates, with Westpac’s consumer sentiment rising 3.7% from 95.6 in June to 99.1 in July.

While the RBA left rates on hold last week, mortgage holders are helping to drive consumer sentiment higher. The July data showed a 5.5% increase in the confidence of mortgage holders, while the components of the index tracking consumer expectations for economic conditions over the next 12 months and five years increased by 5.8% and 5.2% respectively.

Westpac chief economist Bill Evans, though, has sounded a word of warning: While confidence is now 6.8% ahead of July last year, it is still down 4.1% on the reading taken in November 2011, when the RBA first started cutting rates.

“Finally we have some evidence that the Reserve Bank’s policy of cutting the official cash rate by 125 basis points between November last year and June this year is starting to gain more positive traction with households.

“However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead.”

Evans points to the sub-index tracking consumers’ confidence in their personal finances over the next 12 months. While this did rise during July, it remains a worrying 9.4% below last October, before the RBA started cutting rates.

Evans, who has been persistent in his calls for the RBA to keep cutting rates and provide a buffer for the domestic economy in the face of global turmoil, wants more action from the central bank in the coming months.

“It is our view that interest rates in Australia are still too high,” Evans said in his statement accompanying the release of the index.

“In his statement following the interest rate decision on July 3, the Governor described interest rates as ‘a little below medium-term averages’. With the Australian dollar back above parity, despite lower commodity prices, and fiscal policy being quoted by the RBA to be contractionary in the order of 0.75% – 1.5% of GDP, financial conditions in Australia are mildly stimulatory at best.

“Although there are tentative signs of improvement emerging in some interest rate sensitive parts of the economy, these have yet to show a convincing recovery and remain vulnerable to renewed weakness. Meanwhile, the threat from a deteriorating global economic outlook continues to build.”

However, Evans admits there are no guarantees the RBA will keep cutting and Westpac believes the central bank is in wait-and-see mode.

While Evans is still tipping rates have another 75 basis points to fall, he concedes that his prediction of another cut in August could prove too early.

For now though, he’s still sticking his neck out.

“Because we believe that Australia needs lower rates and much can happen, particularly in the international economy, we are comfortable maintaining that view.”