Consumer confidence increases amid March rate cut speculation

Consumer confidence increased by 4.2% in February, according to the Westpac-Melbourne Institute Index of Consumer Sentiment, but the index is still 5.2% below the level of a year ago.

The index increased from 97.1 points in January to 101.1 in February. Westpac chief economist Bill Evans says the result provides some lagged recognition of the two interest rate cuts last year.

“However, the index is still 5.2% below the level of a year ago and 13.6% below its level of two years ago,” Evans says.

Evans says the events of last week – when the Reserve Bank announced its shock decision to leave interest rates on hold – make it difficult to interpret this result.

“Media coverage for February 6 and most of February 7 gave households strong reason to believe that the Reserve Bank was about to cut interest rates for a third time,” Evans says.

“Respondents were likely buoyed by the prospect of even lower mortgage rates.”

“Of course, the last three days of the survey were marked by ‘disappointment’ that the Reserve Bank had not cut rates [and] speculation in the media that the bank was likely to be on hold for the foreseeable future.”

According to Westpac, there are other factors that would have “clearly supported” an increase in confidence, namely news of the global economy, which has improved since the January survey.

Evans points out that all components of the index increased in February.

“The sub-indexes tracking views on ‘family finances compared to a year ago’ [is] up 7%, and ‘family finances over the next 12 months’ up 2.6%,” he says.

“Economic expectations were also improved – the sub-index tracking views on ‘economic conditions over the next 12 months’ up 0.9%.”

“Spending intentions also firmed, with the sub-index tracking views on ‘whether now is a good time to buy a major household item’ up 1.8%.”

Evans says Westpac was disappointed by the RBA’s decision, as stated by Governor Glenn Stevens, to wait for demand conditions to “weaken materially” before any further rate cuts.

“In July last year, we assessed that rates would need to be cut by around 100 basis points in the upcoming easing cycle,” he says.

“At this stage, only 50 basis points have been delivered so we expect that a further 50 basis points, in two tranches, will be required over the course of the year.”

“Today’s survey… does not add to the case for ‘weaken materially’ so there has to be some doubt that our forecast for a cut in March will be delivered.”

Despite this, Evans says Westpac retains its view that an interest rate move is inevitable, if not in March than later in the year.

“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,” he says.