The Westpac–Melbourne Institute Consumer Sentiment Index dropped 9% to 94.5 in December, down from 103.8 in November, pulling confidence back into “cautiously pessimistic” territory after briefly turning positive for the first time since the pandemic reopening.
“After a surprising bounce in November – which resulted in the first ‘net positive’ reading since reopening from the pandemic – confidence has fallen back to around the levels that prevailed just prior,” said Westpac economist Ryan Wells (pictured).
“The index has jumped around in recent months, but it has finished the year broadly in ‘cautiously pessimistic’ territory. While this marks a clear improvement from the prolonged, deep pessimism that defined much of 2024, a sustained move into outright optimism remains elusive for the Australian consumer.”
The December survey was conducted around the final RBA meeting of 2025, with households digesting stronger‑than‑expected inflation data and the bank’s message that while rates are on hold for now, the risk of further hikes remains if price pressures don’t ease.
This quarter’s survey included additional questions on news recall, highlighting the key drivers behind the shift in sentiment.
“Topic-wise, ‘inflation’ remains the dominant news item, more so than in September, although it still has a lower level of recall compared with earlier this year,” Wells said. “However, the tone of this coverage has shifted from somewhat mixed to decisively negative, with 78% viewing it as unfavourable.”
Since the last update, consumers have faced an upside surprise on Q3 inflation figures and “another strong read from the debut of the full monthly CPI for October”. These have also coloured views on borrowing costs.
“These were also associated with a more negative tone on the news surrounding ‘interest rates’, 64% assessing it as unfavourable compared to 44% and 46% in September and June respectively,” Wells said.
News about domestic “economic conditions” and “employment” was also viewed more negatively than three months ago. By contrast, “international conditions” have become less prominent, with recall at its lowest level this year, and the tone around global news at its “least unfavourable” since June 2024, helped by easing trade tensions between major trading partners.
Concern about the interest‑rate outlook has surged.
“Indeed, the Westpac–Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, has catapulted an extraordinary 65.4% over the past three months, including a 22.2% lift in December,” Wells said.
“This represents the sharpest about-face in mortgage rate expectations since we started running this question in the survey in 2010. This was driven by a combination of fewer people expecting interest rate cuts, and more anticipating interest rate rises over the coming year.”
Despite the significant lift in expectations, RBA’s December decision to keep the cash rate on hold “did not come as a significant surprise to consumers, with expectations having already been baked in prior to the announcement”.
“Amongst those with a view, around 86% expect mortgage rates to be the same or higher in a year’s time, with the jump over the past month being largest for mortgage-holders,” Wells said. “This mirrors the move in overall sentiment, which for households with a mortgage has fallen to a 12-month low, whereas for non-mortgage holders, November’s lift in sentiment is now reversing.”
Wells noted that official data point to a genuine upswing in the domestic economy.
“The recovery has been underpinned by solid growth in household spending, and there are early signs that this is starting to spill over more broadly across the economy,” he said.
However, consumers remain cautious about big‑ticket purchases. The “time to buy a major item” sub‑index fell 11.4% in December to 98.9 – back into slightly pessimistic territory after briefly turning optimistic in November.
“This measure has been particularly sensitive to the erosion of purchasing power over recent years, having fallen to deeply pessimistic levels over 2023 and 2024. The sub-index has staged a solid recovery over the past year, up 10.8%, although it is still below the long-run average of 123.5,” Wells said.
Family finances show gradual improvement but remain under strain.
The “family finances vs a year ago” sub‑index fell 5% to 80.9. “Cost-of-living pressures have eased notably over recent years, as evinced by the 32% recovery since its trough in September 2023,” Wells said. “However, there is still clearly some concern over the outlook, with the ‘family finances, next 12 months’ sub-index shedding 6.1% to 102.4, holding in slightly positive territory and modestly below the long-run average.”
On the jobs front, consumers were “broadly unfazed”. The Westpac–Melbourne Institute Unemployment Expectations Index declined 9.1% to 126.8 in December (higher readings indicate more people expect unemployment to rise). The latest result is slightly below its long‑run average, “consistent with a broadly stable labour market”.
Homebuyer sentiment softened in December in line with more “hawkish” rate expectations. “The ‘time to buy a dwelling’ index slipped 10.6% to 86.2,” said Wells.
State breakdowns show sentiment has slipped into slightly negative territory in New South Wales (94) and is weaker in Victoria (80), Queensland (76) and South Australia (83), while Western Australia “remains exceptionally volatile”.
House price expectations have eased from recent highs. “The Westpac–Melbourne Institute Index of House Price Expectations dipped 1.5% in December to 169.9. Still, close to 80% of consumers expect prices to rise over the next twelve months,” Wells said. Queensland (181) and Western Australia (175) strengthened, while New South Wales (172) and Victoria (159) weakened.
Australians are also more risk‑averse about their finances. “Responses to our quarterly question on the ‘wisest place for savings’ show ‘safe options’ are still heavily favoured, 22% nominating ‘pay down debt’ and 34% nominating ‘bank deposits’, the latter being up from 26% in September,” Wells said. “Amongst the ‘riskier’ options, consumers were less inclined towards ‘shares’ (9.3%) than ‘real estate’ (10.7%).”
Looking ahead, Wells said the Reserve Bank’s Monetary Policy Board, which next meets on 2–3 February, faces a delicate balancing act.
“Inflation has lifted recently but there are few signs that either tight labour markets or strong consumer demand are the main driver; rather, it is those administered prices out of the purview of monetary policy that have disproportionately stoked inflation of late,” the Westpac economist said.
“As these and other temporary factors wash out, inflation should resume its trajectory toward the mid-point of the target range. If inflation dynamics take longer to normalise, the risk is that the cash rate could remain on hold for longer than our current base case; indeed, in the post-meeting press conference the Governor put the possibility of rate hikes on the table.
“With the labour market still gradually easing at the same time that private sector demand is finally picking up, though, the RBA must navigate considerable data uncertainty and avoid reacting to data noise.”
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