Consumers subdued despite rate reprieve

by Ben Abbott19 Jan 2012

Consumers are less confident than they were prior to the RBA's cash rate cuts in November and December - though things may have been worse without these cuts, according to Westpac.

The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 2.4% in January, in what Westpac chief economist Bill Evans labelled "a disappointing result" following 50 basis points in cuts.

"The Index is still slightly below the level which it registered before the first rate cut. In effect, at this stage, the rate cuts have been unable to raise consumer confidence," Evans said.

However, Evans said that this did not mean the cuts themselves had had no effect on consumers.

"Given ongoing financial turmoil in Europe, a flat housing market and further weakness in the labour market, sentiment is likely to have been lower without the rate cuts," he said.

The results meant for the sixth time in the last seven months, pessimist outnumbered optimists.

Consumers were also revealed to be concerned about their own financial situation, with a 2.5% drop in the sub-index on 'family finances compared to a year ago' and a small 0.7% gain in income expectations.

The boost to overall confidence came as a result of better expectations for the economy generally.

Evans said the figures meant a rate cut by the RBA on February 7 was likely to eventuate.

“We expect the Board to cut the overnight cash rate by a further 0.25% completing three consecutive meetings when the overnight cash rate has been reduced," he said.

"Even at 4% there is ample scope for the board to go further given the benign outlook for inflation. Indeed, we expect a follow up move in May."