Banks withholding part of RBA rate cut dampened consumer sentiment rise in May: Westpac’s Bill Evans

Westpac chief economist Bill Evans says the failure of the banks to pass on the full May RBA 50-basis-point rate cut impacted on the confidence of borrowers and was a factor in a “disappointing” 0.8% rise in consumer sentiment in May, according to the Westpac Melbourne Institute Index.

Evans says evidence of the muted impact of the cuts in the official cash rate was found in the responses of those surveyed who hold a mortgage.

“Confidence in this group increased only 3% in the survey despite the largest cut in the standard variable mortgage rate since February 2009.

“Since October 2011 the standard variable mortgage rate has fallen by 0.76% yet the confidence of mortgage borrowers has actually fallen by 1.8%,” he says.

Evans described the index of consumer sentiment rising from 94.5 in April to 95.3 in May as a “disappointing result” following the rate cut and “extensive media coverage that the unemployment rate had fallen from 5.2% to 4.9%”.

“However, other factors appear to have offset these positives.”

“Firstly there might have been a degree of disappointment amongst households that the standard variable mortgage rate was reduced by ‘only’ an average of 0.37%.”

“Secondly, increasingly disturbing news around Europe and specifically Greece is likely to have unnerved households,” Evans says.

“We saw some similar evidence around these two factors in December last year.

“At that time, despite a 0.25% reduction in the official cash rate, the Consumer Sentiment Index actually fell by 8.3%”.

Evans says the “soft response” in confidence will be a disappointment for the Reserve Bank.

“It seems extraordinary that the index is 2% below its level in October last year, when the official cash rate was 4.75% – a full 1% above the current level.”

Evans says a number of issues appeared to unnerve households.

“Firstly, and most importantly, concerns around the situation in Europe and secondly some confusion around the flow-on to the mortgage rate as banks delayed their decisions after having responded rapidly following the first official rate cut in November.

“This issue around mortgage rates was also likely to have been a factor behind the 5% fall in the Index in March following a surprise increase in mortgage rates of 0.1% to 0.12%.”

Evans says a negative reaction to the budget may also have played a part in the disappointing consumer sentiment result in May.

“An additional explanation for this weak response of the Index is around the federal budget. We asked a supplementary question in the survey, ‘What impact do you expect the federal budget to have on your family finances over the next 12 months?’.”

“The results were disappointing, with only 9.9% of respondents indicating that the budget would ‘improve’ family finances while 36% indicated the budget would ‘worsen’ family finances.”

This article first appeared on Property Observer.