Consumer sentiment reaches five-month high after rate cuts boost buyers’ hopes

Consumer confidence is now at a five-month high, mostly thanks to the Reserve Bank’s rate cuts say economists, but overall sentiment is still down from its heights.

The latest Consumer Sentiment report from Westpac shows the government’s economic statement from earlier this month, which pinned a $33 billion deficit in the next year, is only partly to blame.

Mortgage holders had some of the biggest increases in confidence, according to the survey, with their confidence increasing by 7.4%.

Overall, confidence has increased 3.5% from July to August.

Westpac chief economist Bill Evans said excluding February-March, the reading is the highest since February 2011. The interest rate cuts in May and earlier this month had a “solid positive impact”, he said.

“It also indicates that the negative response to the government’s Economic Statement which was released on August 2…was muted.

“Equally, there does not appear to have been much impact on sentiment from the announcement of the election date, which occurred one day before the beginning of the survey period.”
Oddly, the decline of the Australian dollar has had a positive impact on sentiment, Evans said.

“Despite the rate cut, confidence in metropolitan areas improved by only 1% over the full week whereas confidence in non-metropolitan areas was up by 11%.

“This latter response would have been a combination of relief for borrowers and a confidence boost for rural communities with the improved export outlook resulting from the more competitive Australian dollar.”

Evans also said the “good time to buy a major household item” index also fell by 5.5%, which he blamed on higher prices due to the lower Australian dollar.

There has also been an increase in sentiment in the “time to buy a dwelling” index, which is up by 3.7% – although Evans said this result was “slightly disappointing”.

“The interest rate cut appears to have boosted confidence around family finances,” he said.

“Family finances compared to a year ago” surged by 13% while “Family finances over the next 12 months” was up by 9.7%. “Economic conditions over the next 12 months “rose by 5.5% although “Economic conditions over the next 5 years” fell by 0.4%.”

And although the RBA has adopted a more neutral stance for now, Westpac expects another cut in November.

“As the Australian dollar stabilises, the labour market continues to weaken, inflation pressures remain contained, and business confidence and investment remain soft, the case for further stimulus will be strong.”