Wednesday 14th March 2012
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A sharp drop in Australian consumer sentiment into negative territory is likely due to rising mortgage interest rates, rising petrol prices and concerns about the economy and employment, says Westpac Banking chief economist Bill Evans.
The Westpac-Melbourne Institute index of consumer sentiment fell five points to 96.1 points in March from 101.1 February – when optimists equal pessimists, the index stands at 100. That compares with 104.1 points in March last year.
Even though the Reserve Bank of Australia held its cash rate steady at its March and February reviews following cuts in November and December last year, Australian banks have been raising their floating mortgage rates in response to rising funding costs.
Evans said widespread predictions the RBA would cut its cash rate in February meant consumers were disappointed when there was no rate cut then.
“With the two previous rate cuts in November and December being passed on in full by the banks, it is reasonable to assume that many borrowers expected a further cut in the mortgage rate of 0.25 percent,” Evans said.
“Instead, mortgage rates were actually increased in the following week with banks raising mortgage rates by an average of 0.10 percent,” he said.
Petrol prices rose 3 percent between Westpac's February and March surveys and measures of 'favourability' for both economic conditions and employment were near the lows registered in the 2008/09 and 2001/02 periods, Evans said.
Recent economic data showing weak GDP growth and rising unemployment are likely to have exacerbated consumers' concerns, as would the sharp fall in company profits reported for the final quarter of 2011, he said.
Since the last RBA board meeting, “we have seen a steady stream of disappointing data releases for Australia” including continuing softness in the housing market.
Internationally, evidence of slowing growth in China has become more widespread although financial conditions in Europe and the US are improving.
“We assess that the case has already been made for lower rates in Australia but expect that, at this stage, the (RBA) board is not convinced,” Evans said. His “best expectation” is for another rate cut in May or June.
The RBA board next meets on April 3.
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