Rate cut does little for consumer confidence, Westpac survey reveals

Consumer confidence has improved, but only slightly, and the result is another disappointing sign that Australians aren’t any more hopeful despite an interest rate cut, according to the latest figures from the Westpac-Melbourne Institute of Consumer Sentiment.

But there is some good news. The index – which measures respondents’ thoughts on when to buy a house – jumped from 9.6% to 17.9% and is now at its highest level since September 2009.

“This message is consistent with other recent evidence of firming auction clearance rates. The response of the housing market to the recent rate cuts will be very important to watch.”

The result shows the index increased by just 1% from 98.2 points to 99.2 in October. It’s now the eighth consecutive month the index has remained under 100 points.

The result is even more disturbing considering Australians were surveyed after last week’s interest rate cut. The RBA cut rates by 0.25% to 3.25%.

Westpac chief economist Bill Evans said the result should have been better, and that it’s “of some concern” the index still remains below levels seen last November before the first 25 basis point rate cut.

Since that time, rates have fallen 125 basis points but the index itself is 4.1% lower.

The fall is especially disturbing considering a fall in unemployment, and news from overseas that financial calamities have been avoided in the short term.

“The announcements of unlimited quantitative easing by the US Federal Reserve and the provision of an unlimited bond buying facility by the European Central Bank were very positive developments.”

“Accordingly, we saw a 3.9% increase in Australia’s share price index since the last survey. While on the domestic front house prices appear to have stabilised and in some cities housing markets generally are beginning to show some tentative early signs of recovery.”

However, there are some good signs. Both components tracking family finances increased, with the finances compared to a year ago up 5.3%, and expectations for finances over the next 12 months up 2.8%.

Also, in a good sign for retailers, the household item potential purchase index has increased by 3.7%.

Evans said the bank now expects the RBA to cut rates again next month – and this result should encourage the central bank to make its move.

“In May we also pointed out that the overnight cash rate was unlikely to bottom out by year’s end with a further cut to 2.75% likely early in the new year,” he said.

“Evidence like today’s underwhelming Consumer Sentiment report points to the need for further reductions in rates.”