Consumer confidence fall = rates on hold

An “extraordinary fall” in consumer confidence in March has added weight to a growing consensus that this month’s official rate rise is likely to be the last for 2008.

Consumer sentiment tumbled 9.1% over the past month and is now at its lowest level since 1993, according to today’s Westpac–Melbourne Institute index of consumer sentiment.

That means confidence levels have fallen 21.2% over the past three months, the sharpest decline experienced by the index since it was created in 1975.

All components of the index were down sharply with respondents reporting:

• The health of family finances compared to a year ago is down by 15.6%.
• Opinions on whether now is a good time to buy a major household item, down by 10.9%.
• Expectations for family finances over the next 12 months down by 8%, and for the economy generally down by 5.6%.

While the survey results come as bad news for retailers, they could be a decisive factor in dissuading the Reserve Bank of Australia from implementing one more interest rate rise this year.

Westpac chief economist Bill Evans says it is now unlikely that the RBA will decide to lift rates again, despite the fact that inflation levels will probably remain at high levels until mid-2009.

“The results from this survey are very important. They indicate that the Reserve Bank’s last rate hike, combined with further independent moves from the mortgage lenders, may have finally slowed demand such that inflationary pressures will ease,” Evans says.

But TD Securities senior strategist Joshua Williamson says while the next RBA move is more likely to be down than up, the international credit squeeze could still see banks lift rates higher.

“The banks are reserving their right to do that; if the cost of credit doesn’t come down we could see further increases independent of the RBA. Wholesale lending rates are currently about 70 to 80 basis points higher than official rates, so it’s quiet a large gap.”

The success of Government and central bank interventions in the US to boost financial markets could be crucial in determining if banks here will lift rates again.

The US Government announcement last night that it will inject $US200 billion into the banking system has been praised, but it is likely further such interventions will be required to bring lending costs down.