Rate Cut Boosts Consumer Sentiment

14 Nov 2011 - Staff Reporter from http://www.rebonline.com.au

Consumer sentiment is improving, with the recent cut in official interest rates inspiring an upswing in confidence amongst Australians, and particularly those with mortgages or who are looking to buy a home, the latest Westpac Melbourne Institute Index of Consumer Sentiment has found.

The Index rose by 6.3 per cent in November, from 97.2 in October to 103.4 in November.

“This result is around our expectations and is clearly driven by the decision by the Reserve Bank to cut the official cash rate by 0.25 per cent with, in most cases, the major lending institutions passing the cut on in full to mortgage borrowers,” Westpac’s chief economist, Bill Evans, said.

“The significance of the rates decision is apparent from the breakdown in responses by home ownership,” he continued.

“Confidence amongst those folks which have a mortgage soared by 13.9 per cent; people who own their house mortgage free boosted their confidence by six per cent; while tenants’ confidence actually fell by 6.8 per cent.”

Mr Evans said the Index shows optimists now outnumber pessimists for the first time since June 2011, although while this is the highest reading for the Index since May 2011 it remains 6.7 per cent below where it was at last year.

Respondents’ outlook in relation to “family finances over the next 12 months” fell from 98.1 to 97.3. “In contrast the sub-indexes tracking views on “family finances compared to a year ago” rose by 7.1 per cent; “economic conditions over the next 12 months” surged by 18.8 per cent; “economic conditions over the next five years” increased by 7.4 per cent; and “whether now is a good time to buy a major household item” rose by 1.8 per cent.

“Not surprisingly, sentiment towards housing improved by a solid 6.5 per cent, while sentiment towards purchasing a motor vehicle was down by three per cent.”

Mr Evans believes the Reserve Bank, which next meets on December 6, has begun an “easing cycle” that is likely to be less aggressive than the 300 basis points in cuts made in 2008.

“Accordingly, we would expect the next move to be in February next year when the Bank has had time to assess the impact of the first move; more information is available about the global economy; and further evidence is available on inflation.

“However, our interpretation of the Bank’s recent Statement on Monetary Policy is that it is troubled by developments in Europe and, due to a more downbeat assessment of the domestic economy, sees clear room to cut further.

“Developments overseas, as we saw in 2008, have the potential to move the next cut forward to December but, for now, our call remains that the next move will be 25 basis points in February with a further 50bps in cuts over the course of 2012.”