Consumer confidence falls short in New Year

Date: 19.01.2012

Successive interest rate cuts fail to deliver any significant turnaround in consumer sentiment, according to Westpac-MI Index

January 19, 2012

Successive interest rate cuts in November and December last year have failed to deliver any significant turnaround in consumer sentiment, according to a new survey.

The Westpac - Melbourne Institute Index of Consumer Sentiment increased by a modest 2.4 percent in January to 97.1, up from 94.7 last month.

Westpac's Chief Economist Bill Evans has labelled the result "somewhat disappointing".

"Despite the Reserve Bank having cut the overnight cash rate by a total of 50bps with the major banks passing on the full cut to variable rate mortgage borrowers the Index is still slightly below the level which it registered before the first rate cut," Evans says.

"In effect, at this stage, the rate cuts have been unable to raise consumer confidence," he says of the current 4.25 percent cash rate.

However, Evans goes on to say that without the rate cuts it is likely that sentiment would have been lower in light of ongoing financial turmoil in Europe and a flat housing market.

INDEX COMPONENTS
According to the latest survey, consumers remain uncertain about their own financial position.

The sub-index tracking responses on ‘family finances compared to a year ago’ fell by 2.5 percent while ‘family finances over the next 12 months’ rose by only 0.7 percent.

"Nevertheless a positive aspect of the recent results is that expectations on family finances are now registering their highest level since February 2011," Evans says.

A more positive long-term outlook contributed to the overall rise in the Index.

The sub-index tracking opinions on ‘economic conditions over the next 12 months’ was up 9.5 percent, while ‘economic conditions over the next 5 years’ improved by 2.4 percent.

Consumers are also more inclined to buy a ‘major household item’, with this particular sub-index
rising by 2.4 percent.

Westpac is predicting a further 0.25 percent cut to the overnight cash rate when the RBA Board next meets on February 7.