Mortgagor confidence buoyed by RBA

by Adam Smith10 Nov 2011

Consumer confidence has seen a major boost due to the Reserve Bank’s move on interest rates.

The Westpac Melbourne Institute Index of Consumer Sentiment rose 6.3% in November following the Bank’s 25bp cut to the official cash rate, and mortgage holders proved most buoyed by the RBA’s decision. Westpac chief economist Bill Evans said the jump in confidence was “clearly driven” by the rate move.

“The significance of the rates decision is apparent from the breakdown in responses by home ownership. Confidence amongst those folks which have a mortgage soared by 13.9%; people who own their house mortgage free boosted their confidence by 6%; while tenants' confidence actually fell by 6.8%,” Evans said.

The uptick in consumer sentiment follows an 8.1% increase in September, when the RBA backed off its previously hawkish stance. Evans said the Index had reached its highest level since May 2011, but still sat 6.7% below its level last year.

“That is even after the Index had fallen by 5.3% in response to the rate hike in November last year,” Evans said.

The rate cut also seemed to bolster consumer confidence in the future of the Australian economy. The sub-index tracking expectations for economic conditions over the next 12 months rose by 18.8%, while expectations for conditions over the next five years rose 7.4%. However, respondents were less optimistic about their own financial future, with the Index’s component tracking views on family finances over the next 12 months falling from 98.1 to 97.3.

“Ongoing concern about respondents' future finances is likely to pose headwinds for future spending patterns,” Evans said.

Sentiment toward housing saw an increase following the rate cut, with the proportion of respondents indicating it was a good time to buy rising 6.5%. In contrast, sentiment toward purchasing a motor vehicle was down 3%.

Despite the lift in sentiment, Evans contended that global economic developments could still take a toll on the Australian economy. He predicted the RBA would follow its Melbourne Cup Day cut with further rate decreases.

“Our interpretation of the Bank's recent Statement on Monetary Policy is that it is troubled by developments in Europe and, due to a more downbeat assessment of the domestic economy, sees clear room to cut further. Developments overseas, as we saw in 2008, have the potential to move the next cut forward to December but, for now, our call remains that the next move will be 25 bps in February with a further 50bps in cuts over the course of 2012,” he said.

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