Australia | Aug 13 2008
By Chris Shaw
With petrol prices having been the biggest driver of consumer sentiment for past several months it is no surprise the Westpac-Melbourne Institute Index of Consumer Sentiment rose in August. The 9.1% gain to a reading of 86.2 almost matched the 8% fall in fuel prices since the July survey.
As Westpac chief economist Bill Evans notes, the gain was the third biggest monthly increase in the past five years. The magnitude of the move is not a great surprise, as the index remains relatively close to its lows of the past 15 years. Other factors also contributed to the rise in Evan’s view, these included an indication interest rates are headed lower and something of a recovery in the Australian equity market.
Together, these factors have given consumers something of a reprieve after a tough few months. This is reflected in the 18% year-on-year increase in the reading for household confidence with respect to their financial position. Confidence in the economic outlook over the next year increased by 14.8%, while Evans notes opinion on whether or not now is a good time for a major household purchase rose 4.1%.
But consumers have retained some level of caution in their outlook going forward. Evans points out confidence about economic conditions over the next five years fell 3.7%, suggesting spending plans are remaining on hold.
Given the latest indications from the Reserve Bank of Australia (RBA), Evans suggests a rate cut in September is likely. A 0.25% reduction is expected, but there is some chance of a 0.5% cut. Assuming the former, he notes, the market is pricing in a further 0.25% move by the RBA in October.
However, history supports the chance of a first move of 0.5%, as Evans points out, the past two easing cycles have begun with such a cut. He also notes, as rates are currently at restrictive levels, there is less chance of overshooting by making a larger cut now to begin the process than would be the case if rates were closer to neutral.