Aussie consumers less upbeat over interest rates

Aussie consumers less upbeat owing to interest rate outlook

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Consumer confidence in Australia, as measured by the Westpac-Melbourne Institute (WMI), unexpectedly fell in February (-2.6%m/m). Though the index is still elevated at 117, we had expected a new record high to be achieved, owing to the RBA’s shock decision to leave interest rates on hold last week. We thought that consumers, particularly mortgage holders, would have felt some reprieve. Evidently, this wasn’t the case.

RBA Board members were last week unsure how households were reacting to the rise in borrowing costs late last year. Indeed, this caution has been justified by today’s consumer confidence numbers, on top of the sub-par retail sales report on Friday which also showed an unexpected decline. The 75bp of tightening delivered in 4Q and the decision in December by several commercial banks to out-hike the RBA have clearly started to bite - the largest falls in confidence in February were recorded in sentiment toward family finances. But, the outlook for interest rates also has dampened sentiment. The WMI said that a massive 93% of those surveyed in February expect the cash rate to rise over the next 12 months, with over 60% expecting the increase to be more than 1%.

We suspect that the RBA may opt to sit on the policy sidelines for some months. As we have highlighted in previous commentary, if Board members were unsure last week how households would react to the rise in borrowing costs late last year, they are unlikely to have much more clarity ahead of the March 2 Board meeting in just a few weeks time. Thus, we suspect the RBA will be on hold until at least the April Board meeting.

All components in the index, excluding that measuring sentiment toward the economy in five years’ time (+1.6%), deteriorated in February from the previous month. Reversing the previous month’s gains, sentiment toward family finances a year ago and in the year ahead posted the largest declines, falling 5.4% and 4.6%, respectively. Sentiment toward the economy in one year’s time (-0.8%) and toward buying major household items (-4.1%) also fell.

ENDS

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