Australian consumer sentiment keeps edging up

Wednesday 10th March 2010

Australian consumer sentiment has so far coped with increases in the central bank’s cash rate, though the point isn’t far away where confidence becomes much more sensitive to bank interest rate increases, according to the Westpac-Melbourne Institute consumer sentiment index.

The index lifted 0.2% to 117.3 between February and March survey as the ‘lucky country’ continued to receive good economic news. Figures last week showed Australia’s economy grew 0.9% in the fourth quarter, the fastest pace in almost two years, helped by fiscal stimulus business investment and increased consumer spending, while the jobless rate unexpectedly fell.

Since the last survey, the Reserve Bank of Australia raised the overnight cash rate by 0.25% to 4%, with banks lifting their variable mortgage rates by a similar amount to average around 6.9%. History suggests 7% is a significant threshold mortgage rate for consumers, Westpac chief economist Bill Evans said.

The survey notes that Australian household debt-to-income ratios are around 20% higher today than in 2003, and this may make consumers more sensitive to interest rate hikes this time round.

The muted response to the RBA’s overnight cash rate increase has partly been explained because Australia’s unemployment rate had surprisingly fallen from 5.5% to 5.3%, with respondents being solidly positive about economic conditions, Evans said.

Separately today, Australian central bank Assistant Governor Philip Lowe said the economy will probably grow at or above its average pace over the next few years, which is likely to stoke inflation. Hearty consumers may help underpin demand for New Zealand’s goods and services in the biggest export market. Australia’s robust return to growth and subsequent interest rate hikes have pushed the kiwi dollar to a decade-low against its Australian counterpart, bolstering returns on exports across the Tasman.

Other positive impacts mentioned by Westpac survey participants have been the strengthening Australian dollar and a sharemarket rally of 4.9% from February to March.

Despite confidence being about 16% above the long-term average, households continue to be quite risk adverse, the survey noted. The proportion of households who see a bank deposit as the ‘wisest place for savings’, or ‘paying off debt’ increased to 53.8% in March from 49.7% in December. The proportion of respondents who favour real estate or shares as the wisest form of savings fell to 25.3% from 29% over the same period.

“This conservative approach to risk is consistent with the more modest recovery in growth in consumer spending than would have been expected given the strong print for the Consumer Sentiment Index,” Evans said.

Businesswire.co.nz

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