Consumer confidence continues to rise, but when will rising rates hurt households?

Two separate surveys have shown consumer confidence continues to rise as the economy recovery, but experts remain concerned that rising rates will eventually start to weigh on households.

The Westpac-Melbourne Institute survey of consumer sentiment for October rose 1.7% from 119.3 in 121.4, continuing an impressive surge in confidence over the last four months.

While the RBA’s surprise interest rate rise last week may have shaken consumers, Westpac’s chief economist Bill Evans says falling petrol prices (down 7.2% in the last month) and the resilience of the labour market is helping to keep consumers’ upbeat.

A separate survey of consumer confidence by Telstra’s Sensis division shows almost 70% of respondents are “confident” about their financial prospects for the year ahead, while less than 20% say they are “worried”.

But report author Christena Singh has highlighted rising concerns about interest rates as a potential drag on confidence over the coming months.

The Sensis survey showed that concerns about interest rates rose for the first time in 12 months, from 5.49 out of 10 to 5.79.

While these rate concerns remain well below worries about the health system (7.28 out of 10), the environment (7.12) and the drought (7.08), it does raise an important question – when will rising rates start to take the wind out of consumers’ sails?

Evans says much will depend on movements in the standard variable mortgage rate. In 2002 and 2003, during the RBA’s last tightening cycle, it wasn’t until the standard variable mortgage rate got above 6.55% and hit 7.05% in December 2003 that consumer confidence really started to suffer.

Given mortgage rates are currently sitting at around 6.05%, it appears likely that consumers can absorb the shock of a few more rates rises before they really begin to get pessimistic.

However, Evans points out the high level of debt being carried by consumers could have an impact this time around.

“Back in 2003 household debt to income ratios were around 130% compared to the current ratio of around 155%,” he says.

“Higher debt levels are likely to make households even more sensitive to increases in the standard variable rate. It is reasonable to expect that once the Reserve Bank’s overnight cash rate starts exceeding 3.5% we will start to see sentiment responding adversely to rate hikes”.