Bank hikes could scuttle confidence recovery

by Adam Smith16 Feb 2012

Consumer confidence has finally seen a boost from last year's rate cuts, just in time to potentially take a knock from bank rate hikes.

The Westpac - Melbourne Institute Index of Consumer Sentiment increased by 4.2% in February, finally showing the delayed effects of consecutive RBA rate cuts late last year. However, the index remains 5.2% below its level a year ago and 13.6% below its level two years ago.

Westpac chief economist Bill Evans said the timing of the survey could also make it difficult to read, and that recent bank hikes could send consumer confidence back downward.

"The survey period was February 6 to February 10. Media coverage for February 6 and most of February 7 gave households strong reason to believe that the Reserve Bank was about to cut interest rates for a third time. While there was some speculation that the commercial banks would not pass the cut on in full respondents were likely buoyed by the prospect of even lower mortgage rates. Of course, the last three days of the survey were marked by disappointment that the Reserve Bank had not cut rates, speculation in the media that the Bank was likely to be on hold for the foreseeable future and other speculation that the commercial banks were now likely to actually raise rates," Evans said.

He pointed out that the impact of the banks' eventual rate rises had not been captured by the current survey, but said the index was 4.2% lower for responses received following the RBA decision compared to the first two days when borrowers still expected a rate cut.

Evans also expressed disappointment at the Reserve Bank's decision to keep rates on hold in February, and its statement that conditions would have to "weaken materially" before it would cut rates again. While Evans said the bank's forecast of a March had been thrown into doubt, he contended that a cut next month was still the best course of action.

"We continue to believe that lower rates are required and the best policy response is to move earlier rather than delay. Accordingly, we retain our view that a move in March is likely while emphasising that developments in the domestic economy, particularly around the labour market, will eventually force the Bank's hand even if they choose to defer in March," he said.

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