Australia | Jul 11 2007
By Chris Shaw
In line with most other economic indicators of the past few weeks the Westpac – Melbourne Institute Index of Consumer Sentiment remains at very high levels, this despite recording a small drop of 0.6% in July.
The Index is now at 120.8, down slightly from its record high of 123.9 recorded in May, Westpac chief economist Bill Evans noting conditions continue to be supportive given interest rates have been kept on hold, petrol prices have fallen more than 5%, the Australian sharemarket has continued to climb and the Aussie dollar has strengthened further against the US dollar and a number of other currencies.
The only negative in terms of the Sentiment Index in recent months has been relatively weak retail spending figures in both April and May, though Evans suggests this may be a response to particularly strong figures from the March quarter and is likely to reverse itself in the data for June and July.
In terms of what the Consumer Sentiment Index means for investors, Evans notes there is a history of official interest rates being increased soon after the Index hits record or near-record highs. With June quarter inflation figures due out later this month he suggests there is likely some nervousness in the market about the potential for the Reserve Bank of Australia to again lift rates when it meets in August.
Such an outcome is unlikely in his view as while inflation appears to again be trending higher the July data is unlikely to be strong enough to force the RBA’s hand. Rather, early in 2008 is seen as the most likely time for the next increase in rates in the bank’s view, which would fit in with the model’s history in terms of defining the relationship between sentiment and changes in official interest rates.