Australia | Feb 10 2010
By Chris Shaw
In what could be seen as a vindication of the Reserve Bank of Australia's (RBA) decision not to increase interest rates at their meeting early in the month, the Westpac-Melbourne Institute Consumer Sentiment Index fell by 2.6% in February to a reading of 117, down from 120.1 in January.
Westpac chief economist Bill Evans points out while interest rates were held steady this month, Australian households remain of the view they are headed higher as 93% of consumers responding to the survey expect rates to move higher in the next 12 months, 60% expecting rates to increase by more than 1.0%.
Even allowing for this month's fall in the Index, Evans notes consumer confidence remains at elevated levels as it is 2.9% above the reading of December last year, 3.2% above the level of six months ago and 15.2% above its long-term average.
Aside from interest rates, Evans suggests adverse developments in the global economy likely played on sentiment, these factors including moves by Chinese authorities to slow their economy and the emergence of sovereign risk concerns in Europe in particular. As well, Evans notes Australian equities have fallen about 8% from their level at the time of the previous survey, while the Australian dollar is down by around 6.5%.
Falling petrol prices since the last survey would have helped offset some of this, but not enough to stop consumers turning more cautious with respect to their own finances. Evans notes responses to “family finances compared to a year ago” fell by 5.4%, while the 12-month outlook for finances was down 4.6%.
Expectations for “economic conditions over the next 12 months” were down by just 0.8%, while the five-year outlook for economic conditions actually rose by 1.6%. To show how cautious consumers are becoming, responses to “whether now is a good time to buy a major household item” were down 4.1% and are now just 2.6% above the long-term average of 127.8.
The RBA decision to keep rates steady in February left the market expecting a similar decision when the RBA meets again on March 2nd, but as Evans notes rates are not yet back at neutral levels, which he estimates is around 4.5%, despite the RBA's view growth will return to trend levels in 2010 and 2011.
For as long as the RBA expects growth will recover yet rates remain below neutral levels, Evans sees any decision on rates as a close call, especially as the central bank will have had enough time at the March meeting to assess the impact of the rate hikes delivered in the latter stages of 2009.
While current market sentiment is weak, Evans suggests a return to more stable conditions in the global economy in the next few weeks could result in the RBA moving to again lift rates at its meeting next month.