Consumer sentiment up 3.7% as rate cuts make their mark

The Westpac–Melbourne Institute Index of Consumer Sentiment increased by 3.7% in July, suggesting the spate of interest rate cuts is finally having an impact on household spending.

Consumer sentiment increased on the index measure from 95.6 points in June to 99.1, which, according to Westpac chief economist Bill Evans, suggests recent interest rate cuts are starting to gain more positive traction with households.

“However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead,” Evans says.

“The index is now 2% above its level in October last year prior to the beginning of the rate cut cycle.”

“However it is still 4.1% below the reading in November last year when households responded positively to the first rate cut.”

Evans says households were “probably buoyed considerably” by the result of the Greek elections and the positive reception to the latest European leaders’ summit.

According to Evans, there was also some positive news around the domestic economy.

“Petrol prices are down by 7% since the last survey and have now fallen 13% since May [and] the Australian dollar rallied from 98 cents to 102 cents versus the US dollar,” he says.

Evans points out that all components of the index increased in July.

“The sub-indexes tracking consumer expectations for economic conditions over the next 12 months and five years increased by 5.8% and 5.2% respectively,” he says.

“The sub-index tracking responses on ‘whether now is a good time to purchase a major household item’ rose by 1.1%.”

Respondents were also more positive about their own finances.

“The sub-indexes tracking assessments of finances relative to a year ago improved by 4.6%; and the outlook for finances over the next 12 months improved by 3%,” Evans says.

“However, disturbingly, the sub-index tracking respondents’ outlook for their finances over the next 12 months is still 9.4% below the level in October last year prior to the beginning of the Reserve Bank’s rate cut cycle.”

The Reserve Bank board will next meet on August 7. According to Evans, Westpac believes interest rates are still too high.

“With the Australian dollar back above parity, despite lower commodity prices, and fiscal policy being quoted by the RBA to be contractionary… GDP financial conditions in Australia are mildly stimulatory at best,” he says.

“Although there are tentative signs of improvement emerging in some interest rate-sensitive parts of the economy, these have yet to show a convincing recovery and remain vulnerable to renewed weakness.”

“Meanwhile, the threat from a deteriorating global economic outlook continues to build.”

But Evans says the recent rhetoric from the RBA indicates it is in a “wait and see” mindset.

“Our call that the next cut will come in August could prove to be too early,” he says.

“However, because we believe that Australia needs lower rates and much can happen, particularly in the international economy, we are comfortable maintaining that view.”