Confidence Rises as Rates Drop

February 13th, 2015
Australian consumer confidence has gone up in response to the latest interest rate cut, jumping to its highest level in a year. According to the long-standing Westpac-Melbourne Institute Index of Consumer Sentiment, confidence grew by 8 percent in January to reach a new high of 100.7. While weak business confidence continues to threaten the Australian economy, low rates and cheaper oil prices have brought renewed optimism to consumers.

The Westpac index measures consumer sentiment through an average or five component indexes, with householders reflecting on their financial situation and anticipating conditions over the coming years. ; With questions relating to savings, property, and vehicles, Westpac aim to get an accurate overview of consumer sentiment in the wider community. ; After dropping 6.8 percent in reaction to the federal budget last year, the index is now sitting 1 percent above its pre-budget level. ;

While the Reserve Bank's decision to cut interest rates from 2.50 percent to 2.25 percent undoubtedly lifted confidence, dropping oil prices over the last month and recent movement in the share market has also had an effect. ; "The 21 per cent fall in average petrol prices over the last two months is the largest two month fall in prices since December 2008," said Westpac's chief economist Bill Evans in the report, adding "Similarly, the 9.7 per cent rise in the share price index since the January survey is the biggest one month rise in the share market since August 2009." ;

Recent events in federal politics also seem to have influenced the index, with a rise in confidence partly put down to increased optimism among ALP supporters, third-party voters, and the undecided. ; "It's always difficult to disentangle the drivers, the forces at work in sentiment, but I think that broad picture of a negative for Coalition voters and more positive picture elsewhere does tell you there was a political angle to some of the sentiment rally overall," said Westpac senior economist Matthew Hassan in an interview with the ABC.

The case for business is not so strong, however, with a recent survey of business confidence by National Australian Bank showing levels below the long-term average. ; While the January Business Survey recorded a slight increase in business confidence over the month, the overall picture was of a soft economy with little momentum. ; Confidence was especially weak in the resources sector, with transport/utilities also down but the retail sector up on the back of the rising consumer index.

With weak business confidence balancing rising consumer optimism, not everyone is optimistic about Australia's economic future. ; "Weak confidence is a significant economic threat," said Commonwealth Bank chief executive Ian Narev, adding "Businesses need the certainty to invest to create jobs, and households need a greater feeling of security... ; That requires implementation of a coherent long-term plan that clearly addresses target government debt levels and time frames, infrastructure priorities, foreign investment, business competitiveness policies and, above all, job creation."