Consumer confidence up after rate cut, survey reveals

by Julia Corderoy13 Feb 2015
Consumer confidence has surged 8% in February, indicating that the Reserve Bank’s decision to further cut the cash rate has had the desired effect on consumer sentiment.

 For the first time since February last year, the latest Westpac Melbourne Institute Index of Consumer Sentiment saw a majority, albeit miniscule, of optimists over pessimists. It is also the highest level of the Index since January last year.

Westpac’s chief economist Bill Evans says this is a much stronger result than he had expected, and it should ease concern that rate cuts, in the current environment of record low rates, can have perverse effects on consumer confidence.  

“The idea that households would be unnerved by the implication that authorities might be responding to a surprise deterioration in economic circumstances seems to be strongly disputed by this result,” he said.

Consumer economic outlook improved sharply with the sub-indexes tracking expectations for ‘economic conditions, next 12 months’ up 10.3% and ‘economic conditions, next 5 years’ up 13.3%.

The Index also revealed that the rate cut has strongly boosted confidence in the housing market. The index tracking views on ‘time to buy a dwelling’ jumped by 9.7% to reach its highest level since February 2014. Similarly, the index of house price expectations jumped by 6.9% to reach its highest level since September 2014.

However, despite the increase in the Index, Evans still believes another rate cut is imminent – most likely at its next board meeting on March 3.

“The February cut has been delivered and the Bank, in setting out its growth and inflation forecasts in its February Statement on Monetary Policy, has almost certainly guaranteed a follow up cut by assuming a further cut when formulating those forecasts.

“… For now, we are comfortable to maintain our original call for a follow up move in March,” he said.

It will be interesting to see, however, the results of the next Westpac Melbourne Institute Index of Consumer Sentiment considering the latest unemployment figures revealed a spike in unemployment. The unemployment statistics were released yesterday – after the Index – and saw the unemployment rate in January jump 0.3% to 6.4%.

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