Consumer sentiment shrugs off rate hike – for now

Consumer confidence has remained surprisingly resilient in the face of two consecutive rate rises, with Westpac’s consumer sentiment index falling just 1% in March.

In what Westpac chief economist Bill Evans described as a “strong result”, the consumer sentiment index fell by 1% in April from 117.3 in March to 116.1 in April. This followed an 0.2% rise in the index in March.

So far at least, it seems consumers have largely shrugged off the impact of rising rates, which still remain near historical lows.

“It is reasonable to conclude that from the perspective of the Index the rate hikes have not started to impact on the confidence of the Australian consumer,” Evans said in a statement.

“Since the RBA started raising rates in October last year the average variable mortgage rate has increased from 5.8% to 7.15% and the Index has fallen by a modest 2.7%.”

But the point at which rising rates do start to shake consumers might be coming.

Evans says that when mortgage rates last hit 7.3% in March 2005, consumer sentiment plunged by 15.3%.

The following seven rate rises between May 2006 and March 2008 caused the index to drop by an average of 8.5% in the month after rates rose.

“This savage response from consumers to rising rates was one of the reasons why the RBA’s rate hike cycle was drawn out over nearly six years.”

In more good news, indices tracking expected conditions in the next 12 months, expected conditions in the next five years and whether it is a good time to buy a major household product all rose.

However, there was one dark spot – the index tracking sentiment around “expected family finances over the next 12 months” plunged by 8% in the month, the biggest fall in almost two years.

“It may indicate that consumers are at least concerned about rates from their personal perspective but see relief in the general outlook for the economy,” Evans said.

Evans, who has expected the RBA to leave rates on hold on April, believes the Bank is clearly in a hurry to bring rates back to “normal” levels.

“Our best assessment is that the next rate hike, which we expect to be the last for some time, will come in May although a delay to June would certainly not surprise.”

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