Australia | Mar 10 2010
By Chris Shaw
Australian consumer sentiment continues to show resilience to higher interest rates, as indicated by the Westpac-Melbourne Institute Consumer Sentiment Index rising 0.2% in March to a reading of 117.3, up from 117.0 in February.
Westpac chief economist Bill Evans viewed the result as a solid one given the backdrop of another increase in interest rates, though he notes mortgage rates are still not at the point where further increases have a major impact on confidence levels.
The variable mortgage rate is currently at around 6.9%, Evans noting history suggests 7.0% is a significant threshold mortgage rate for consumers. When mortgage rates were last lifted above this level in 2005 consumer sentiment subsequently fell sharply, the ongoing rate increases in 2006-2008 causing further falls on each occasion.
Given this, Evans suggests we may be near the point where confidence becomes more sensitive to increases in interest rates, particularly as household debt to income ratios are around 20% higher today than they were in 2003.
Evans suggests one reason the March rate increase by the Reserve Bank of Australia (RBA) had little impact on sentiment was the strength of the Australian labour market, as this has been good for consumer confidence.
A stronger Australian dollar and stronger share markets have also been positive for sentiment in his view, while a modest 2.5% increase in petrol prices since the last survey is not expected to have had much impact on confidence.
Evans notes households continue to be quite risk averse despite the solid confidence readings, as the proportion of those who see a bank deposit or paying down debt as the 'wisest place for savings' has increased from 49.7% in December to 53.8% in March.
In contrast, the proportion of those respondents who favour real estate or shares as the wisest form of savings has fallen from 29% to 25.3% over the same period.
In terms of components of the Index, Evans notes positive responses to 'family finances compared to a year ago' rose by 1.4% in March, while responses to 'family finances over the next 12 months' rose 5.5%. There was little change with respect to spending intentions in the March responses.
Looking ahead, Evans notes expectations for 'economic conditions over the next 12 months' were down by 1.9%, while for 'economic conditions over the next five years' the decline was a slightly larger 2.7%.
The RBA meets again on April 6 and Evans expects they will pause on rates at that meeting given his assessment their view is rates are now within 50-basis points of a neutral setting.
A further 0.25% rate hike is expected at the May meeting however as Evans suggests resilient confidence levels and ongoing labour market improvements will highlight the need to normalise rates reasonably quickly.
Once 50-basis points of hikes have been made, Evans expects a longer pause with respect to any further rate increases from the RBA given expected greater sensitivity of households to such increases once the 7.0% level for mortgage rates has been breached.