March 10, 2010The Westpac–Melbourne Institute Consumer Sentiment Index increased by 0.2 percent in March from 117 in February to 117.3.
Westpac's Chief Economist Bill Evans assures this is a solid result given the backdrop of a fourth official rate rise.
“However the previous rate hike cycle and the March sentiment reading suggests mortgage rates have not reached the point where increases have a major impact on confidence,” Evans says.
Since the last survey, the RBA increased the overnight cash rate by 0.25 percent to 4 percent.
The variable mortgage rate is now averaging around 6.9 percent, according to Westpac.
Evans explains households are holding significantly more debt than previous years, with debt income raios around 20 percent higher than they were in 2003.
As a result, consumers may become more sensitive to rate rises if recent trends continues.
Other factors may have contributed to the muted response to the March rate hike, according to Evans.
“In particular the labour market has been having a positive impact on confidence. Since the last survey it was reported that Australia's unemployment rate had surprisingly fallen from 5.5 percent to 5.3 percent with nearly 53,000 new jobs being reported,” he says.
“Not surprisingly ‘interest rates’ are the next most recalled news item although sentiment is slightly less unfavourable in March than it was in December following the three consecutive rate hikes.”
Other positive impacts on sentiment have been the Australian dollar and respondents' assessments of ‘international conditions’.
Petrol prices have increased by a modest 2.5 percent with little likely influence expected on confidence.
Economic outlook
The economic outlook deteriorated a little: views on ‘economic conditions over the next 12 months’ falling by 1.9 percent while expectations for ‘economic conditions over the next 5 years’ were down by 2.7 percent.
There was little change in spending intentions. Opinions on ‘whether now is a good time to buy a major household item’ were down by 0.5 percent.
With the Reserve Bank Board next meeting on April 6, Westpac expects the Board will decide to hold rates.
“We assess that the Bank now believes that rates are only around 50bp's below neutral and the urgency associated with the three consecutive moves between October and December last year has passed. However, we are forecasting a further 25bp rate hike following the next board meeting on May 4,” Evans says.
“The resilience of confidence and the continuing improvement in the labour market will be key factors emphasising to the Board that policy still needs to be normalised reasonably quickly,” he says.
“However we expect that once rates have risen by another 50bp's the Bank will opt for a longer pause. A key to that decision will be in the expected greater sensitivity of households to rate hikes. As we saw in the last cycle, once the variable mortgage rate reached 7.25 percent households’ responses to rate hikes became much sharper.”
