Sentiment still flat despite RBA’s 50 basis point cut

Despite the 50 basis points cut, the latest Westpac Melbourne Institute Index of Consumer Sentiment showed an underwhelmed consumer sentiment as it rises a bare 0.8 per cent, from 94.5 index points in April to 95.3 in May. Consumer sentiment reading below 100 implies that there are more pessimistic than optimistic consumers.

Bill Evans, Westpac’s Chief Economist, shared that the sentiment was lower than expected saying, “This is a disappointing result. It follows a surprise 0.5% cut in the official cash rate by the Reserve Bank and extensive media coverage that the unemployment rate had fallen from 5.2% to 4.9%.”

The low consumer sentiment was said to be due to lenders not passing on a full rate cut and the unstable European financial condition. Evans stated, “Other factors appear to have offset these positives. Firstly there might have been a degree of disappointment amongst households that the standard variable mortgage rate was reduced by ‘only’ an average of 0.37%. Secondly, increasingly disturbing news around Europe and specifically Greece is likely to have unnerved households.”

Evans went on saying, “We saw some similar evidence around these two factors in December last year. At that time, despite a 0.25% reduction in the official cash rate, the Consumer Sentiment Index actually fell by 8.3%. A number of issues appeared to unnerve households. Firstly, and most importantly, concerns around the situation in Europe and secondly some confusion around the flow on to the mortgage rate as banks delayed their decisions after having responded rapidly following the first official rate cut in November. This issue around mortgage rates was also likely to have been a factor behind the 5.0% fall in the Index inarch following a surprise increase in mortgage rates of 0.10-0.12%.”

The RBA slashed 50 basis points on the interest rates to 3.75% on May 1, the only biggest single cut made since the global financial crisis occurred but the aim to target weak economic growth and confidence seemed to fail.

“This soft response in Confidence will be a disappointment for the Reserve Bank. It seems extraordinary that the Index is 2.0% below its level in October last year when the official cash rate was 4.75% – a full 1% above the current level.”

The federal budget could have also affected consumer confidence. Evans added, “An additional explanation for this weak response of the Index is around the Federal Budget. We asked a supplementary question in the survey, “What impact do you expect the Federal Budget to have on your family finances over the next 12 months?” The results were disappointing with only 9.9% of respondents indicating that the Budget would ‘improve’ family finances while 36% indicated the Budget would ‘worsen’ family finances. Around 50% expected no change and 4%,’did not know’. It appears that the Budget was not a positive for Confidence but this result must be assessed in the light of previous Budgets. The same question in 2011 found only 6.5% expected last year’s Budget to ‘improve’ family finances with 36% – the same reading as in this year’s survey – saying they would ‘worsen’. Overall, it is reasonable to conclude that recent Budgets have not been constructive for confidence although the 2012–13 Budget has been a little more positive than last year. Indeed, the Index fell 1.3% in May 2011 compared to this month’s0.8% rise.”

Evans believes the low consumer sentiment could be a reason for the RBA to cut rates again. “It is our current view that the Bank will wait until July before it cuts again but developments overseas along with today’s evidence that the recent cut has had little impact on Confidence could easily see the Bank bring that decision forward to the next Board meeting in June.”

Margy Osmond, chief executive of the Australian National Retailers Association shared that she was also surprised of the flat result stating, “With a 50 basis point drop in the cash rate and significant family payments in the federal budget retailers expected confidence to rally. And while an uptick is better than a decrease, it’s still a concern that people feel so under pressure with their finances.”

A previous report from the Boston Consulting Group revealed that many Australians are anxious of the possibility of the global downturn. A BCG spokesman stated, “Australia might be half a world away from the European financial crisis and the high unemployment levels of the northern hemisphere, but Australian consumers are just as battered and cautious as those in the U.S., the U.K. and many other developed countries.”

CommSec economist, Savanth Sebastian, shared that the main reason why many Australians feel like so is because they know the of the global environment’s uncertainty, which at the moment is made evident by what’s happening in Greece.”Those fears are firmly entrenched among consumers. There is a sense that the global financial crisis isn’t really over,” Sebastian stated.


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