Confidence struggles despite Rate cut

August 15th, 2016
The recent interest rate cut by the Reserve Bank failed to make a big impact on consumer confidence, with optimists only slightly outnumbering pessimists despite 25 basis points being shaved off the official cash rate. While the modest boost is an improvement on the last couple of months, moves by the Reserve Bank have failed to inspire confidence in the real world as the big banks refuse to pass on cuts in full.

The Westpac Melbourne Institute Index of Consumer Sentiment rose by just 2.0 percent in August, from 99.1 points in July to a level of 101.0. That left the survey index up 1.6 percent on August last year, with some commentators going as far as saying that Australia is stuck in a rut. With interest rates now sitting at a record low of 1.50 percent, the response of consumers has been muted at best. Business confidence remains solid, however, with the NAB business survey sitting just below the long term trend at 4. ; ;

According to Westpac chief economist Bill Evans, optimists have only outnumbered pessimists in eight of the past 30 months, with three of those four times occurring in the past four months. Despite a "lift in the Index" and "an improved outlook for the Australian economy," however, there is a common feeling that interest rate cuts are not making the impact they once did. For example, even the recent May rate cut saw the consumer confidence index rally by 8.5 percent.

According to Evans, there were three main reasons for the lacklustre result: "Firstly, there was a large surprise element to the May decision with, arguably, significantly less intense media speculation than we saw in August... Secondly, the standard variable mortgage rate offered by most banks was reduced by the full 0.25 per cent, (in May) whereas in August, the four major banks only reduced variable rates by 0.10-0.14 percentage points. Finally, the Index was coming from a significantly lower starting point in May (95.1) than in August (99.1)."

Interest rate cuts normally lead to a sharp increase in confidence as borrowers expect lower interest repayments. This time around, however, consumers have all but given up hope on finding mortgage relief as the banks failed to pass on interest rate cuts in full. Even the likelihood of rate stability or further cuts is failing to inspire confidence: "In our special question around the outlook for mortgage rates, 37 per cent of respondents expect mortgage rates to rise over the next 12 months; 36 per cent expect rates to be steady; and just 27 per cent expect further rate cuts." said Evans.

In a recent forecast, National Australia Bank's chief economist Alan Oster said he is expecting two more rate cuts, with "unconventional" monetary policy measures possible unless the economy kicks into gear: "This will include two more 25-basis-point cuts in May and August 2017 - to a new low of 1 per cent - which should be enough to stabilise the unemployment rate, which is currently a concern for the RBA, at just over 5.5 per cent." With inflation expected to remain below the 2-3 percent target band until mid-2018 and wage growth continuing to slow, it seems even the good news is not enough to get people spending.

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