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Consumer sentiment ‘deeply pessimistic’

Consumer sentiment ‘deeply pessimistic’
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Despite the RBA placing the cash rate on hold, consumer sentiment dropped with potential dwelling purchase confidence falling even further.

The Reserve Bank of Australia’s (RBA) decision to cease raising the cash rate has done little to impact consumer sentiment, according to the Westpac-Melbourne Institute Consumer Sentiment Index.

The index dropped to 81 in August, down 0.4 per cent from July, with continued pressures on family finances and concerns regarding the interest rate and economic outlook “weighing heavily on confidence”.

The report found even the consumer subgroup of mortgage holders provided a “disappointing reaction” to the RBA’s decision, with sentiment among those with a mortgage dropping 7.2 per cent in August despite the two-month rate pause.

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The major bank said the “lacklustre response may be partly due to the RBA’s continued warnings that further tightening may still be required”.

Potential home owners’ sentiment remains low

The report found despite the positivity around slowing inflation and stalling interest rates it had achieved little in changing the attitudes towards spending.

The research’s “time to buy a dwelling” index fell 5.7 per cent in August to 72.1, dropping the previous month’s gain and returning to “near extreme historical lows” with the long-run average of 121.

Westpac’s senior economist Matthew Hassan said: “The combination of high-interest rates and high prices remains deeply discouraging for buyers.

“However, regional variations point to a more nuanced picture, buyer sentiment actually improving in Sydney (+7.9 per cent) and relatively steady in Melbourne (-0.2 per cent) but weakening more markedly everywhere else (-12.9 per cent on a combined basis).

“If nothing else, this suggests there may be fear of missing out factor coming into markets with already very stretched affordability that are starting to see renewed price gains.”

Cost of living impact

The major bank said the consumer nerves about the interest rate outlook were likely compounded by ongoing cost-of-living pressures, even though the June CPI report revealed better-than-expected inflation results, still remaining high at 6 per cent.

Examples of increased costs provided by Westpac included fuel surging 17¢ to $1.82 per litre between the July and August surveys and benchmark maximum rates on power prices increasing 20 to 25 per cent across the eastern states.

Mr Hassan said: “We have argued previously that sentiment is unlikely to stage a sustained lift from current deeply pessimistic levels until inflation – both as measured officially and experienced by consumers day-to-day – is much lower and interest rates are more firmly on hold.”

Sentiment ‘unlikely to materially improve’ until past inflation

Rival major bank CBA said the report pointed to a “deep level of pessimism among respondents” and was surprised that sentiment among those surveyed after the RBA meeting was lower than those questioned before the decision, despite rates being on hold.

CBA economists said: “Until expectations of rate rises are lowered and inflation moves closer to target, sentiment is unlikely to materially improve.

“The fixed rate roll-off is also now in full swing. As such, mortgage holders who have recently moved to or are about to transition to a variable rate will be experiencing a large cash flow impact despite the pause, possibly denting sentiment.”

Australian credit reporting agency CreditorWatch’s chief economist Anneke Thompson, who agreed with both CBA and Westpac, said: “Consumers are unlikely to report any improvement in confidence until inflation looks to be firmly in the rear-view mirror.”

[Related: Interest rates weaken household spending, latest data reveals]

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