Popular budget and low rates boost consumer confidence

by Julia Corderoy21 May 2015
Consumer confidence rose to a 16-month high in May, and reported the biggest post-budget lift in confidence in eight years. 

The Westpac/Melbourne Institute index of consumer confidence rose by 6.4% in May. The confidence index is now up 10.1% on a year ago and represents the largest lift in post-budget confidence since May 2007. 

“This is a very strong result. It is the first time since February this year that the Index has been above 100, the point above which optimists outnumber pessimists. It is the highest level of the Index since January last year,” Westpac chief economist, Bill Evans said.

“Clearly, the two driving forces behind this boost have been the Federal Budget and the interest rate cut which the Reserve Bank delivered in the first week in May.”

However, the survey suggests that interest rate cuts may be losing their ability to stimulate confidence and encourage spending.

“Confidence in housing recovered somewhat. The Index ‘Whether now is a good time to purchase a dwelling’ increased by 5.0%. The interest rate cut would have been a key factor in this regard. However, the Index is still 9.4% below its level in February following the previous rate cut,” Evans said.

House price expectations fell by 3.2% over the month. It is now only 3% above its level from a year ago. According to Evans, the move does seem to be consistent with the somewhat cautious sentiment emerging in some housing markets.

As a result of the overall uplifting results, Westpac believes there is “little to no chance” of a rate cut when the Reserve Bank meets on June 2.

“Having cut rates at its previous meeting in May there is little to no chance that the Bank would move again in June. The minutes from the May board meeting highlight that the Bank is relying on an ongoing boost to household expenditure to encourage businesses to invest and employ setting the economy onto a path of a falling unemployment rate and above trend growth in 2016,” Evans said.

“Such a scenario would be consistent with an extended period of steady interest rates.”

Despite the Reserve Bank leaning towards an easing bias lately, CommSec agrees, saying the central bank is now likely to keep rates on hold.

“The Reserve Bank would be encouraged by the latest round of domestic data. The Central Bank has maintained an implicit easing bias although CommSec expects the Reserve Bank to leave interest rate settings on hold,” Savanth Sebastian, economist for CommSec said.