Australia | Nov 15 2006
By Rudi Filapek-Vandyck
It was always going to be a highly predictable outcome, even Westpac Chief economist Bill Evans acknowledges this much. When the Reserve Bank of Australia (RBA) hiked in March 2005 the Westpac-Melbourne Institute Index of Consumer Sentiment fell by 15.5%. Immediately after the RBA hiked again in May this year the index fell by 6.4%. The fall was larger when a repeat followed in August: down by 16.2%.
So what happened this time? The Westpac Melbourne Institute Index of Consumer Sentiment fell by 9.7% from 105.2 in October to 95.0 in November. No surprise thus, especially with the survey conducted over the five days immediately following the announcement of the November rate hike.
Nevertheless, and taking into consideration positive factors such as lower petrol prices and a stock market at record high levels, economist Evans comments the “fall is somewhat larger than expected, given that the rate hike was widely anticipated and appears not to have attracted as much publicity as previous moves”.
Westpac now believes developments over the next two months will be key to the future direction for economic activity throughout Australia and thus, ultimately, for interest rates in 2007.
Consumer confidence, by the way, recovered by 10.0% in April/May 2005; by 16.9% in September/October 2006; and by 3.0% in June/July 2006. This could bode well for the coming Christmas sales period.
However, Evans highlights the level of the Index is now at its second lowest since the global recession in early 2001. The only lower reading was in August this year, and, at that time, confidence bounced back very quickly. The Westpac economist suggests the odds are in favour of a bounce back as many market commentator has played down the prospect of further interest rate increases ahead.
He said the confidence of mortgagees fell by 13.2% while those who wholly owned their homes confidence was down by only 6.9%. Tenants were also surprisingly pessimistic, with their confidence falling by 14.5%.
It remains Westpac’s view there is a “significant chance” the RBA will raise again by 0.25% on February 7.