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Potential rate cut driving consumer confidence boost

The prospect of a possible rate cut by the RBA has helped lift consumer confidence in February, according to a new consumer sentiment survey.

The latest Westpac-Melbourne Institute consumer sentiment index, which involved a survey of 1,200 consumers, rose over the month to 103.8 in February.

This marks a 4.6 per cent improvement to the 99.6 recorded in January and suggests a rebound in consumer confidence into “cautiously optimistic” territory, as an index level greater than 100 suggests that optimism outweighs pessimism.

The majority of the overall confidence boost was driven by existing mortgagors. The survey found a “strong” 7.4 per cent lift in sentiment among Australians with a mortgage.

The increase in consumer confidence was attributed partly to the Reserve Bank of Australia’s (RBA) “recent shift in tone”.

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According to the Westpac-MI report, from 4 February to 9 February, when consumers were surveyed, RBA governor Phillip Lowe gave “a clear signal that the [central bank] now has a more evenly balanced view on the next move on rates, compared to the ‘next move likely to be higher’ assessment that it maintained throughout 2018”.

In an address to the National Press Club, Mr Lowe has acknowledged that the central bank’s next monetary policy adjustment could be a cut to the record-low cash rate of 1.5 per cent, adding that given “uncertainties” regarding labour market conditions and the inflation rate, it is “possible that the economy is softer than we expect”.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” the RBA governor said.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios.

“Today, the probabilities appear to be more evenly balanced.”

Westpac senior economist Matthew Hassan said the improvement in consumer sentiment “will be of some comfort to the [RBA] given its concerns around spillovers from the housing downturn”.

“However, developments in the housing market continue to highlight downside risks to the outlook,” he continued in the report.

The senior economist remains of the view that the major bank’s “weaker forecasts have not been weak enough to warrant forecasting a rate cut”.

“Accordingly, even if the RBA moves further towards Westpac’s current view, it seems likely that rates will remain on hold. The threshold for policy is whether spillovers knock the labour market off course. Our current forecasts do not incorporate that prospect but we acknowledge downside risks,” Mr Hassan wrote.

Perceptions around whether it’s a good time to purchase a major household item improved by 0.3 or a percentage point month-on-month to 118.6 in February, while views on whether it’s a good time to purchase a home fell by 1.9 per cent over the month to 112.7.

Outlook for house prices also fell by 8.4 per cent in February to 87.8. This is in line with recent CoreLogic data, which revealed that the value of dwellings had shrunk by 4.8 per cent in 2018 when compared to the previous calendar year, marking the weakest housing market conditions since the global financial crisis.

The property data and analytics company had stated that the “accelerated” “downturn” was driven primarily by consistently larger quarter-on-quarter declines in Sydney and Melbourne, but also sluggish conditions in other capital cities and most regional areas.

“In particular, the continued house price correction, concentrated in Sydney and Melbourne, is impacting consumer expectations for house prices but so far appears to be having only limited spillover effects on wider confidence,” Mr Hassan states in the report.

“Sentiment amongst consumers in NSW and Victoria is holding up well, averaging in line with the readings nationally.”

Consumers’ views on family finances “showed a more promising gain” during the period the survey was conducted, according to the report, with the sub-indexes of “family finances vs a year ago” and “family finances next 12 months” both rising by 5.6 per cent to 89.4 and 5.5 per cent to 107.8, respectively.

The “economic outlook over the next 12 months” sub-index was also up 7 per cent over the month to 103, while views on the “economic conditions over the next five years” increased by 3.8 per cent to 100.2.

[Related: RBA open to cutting rates amid shift in outlook]

Potential rate cut driving consumer confidence boost
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