Consumer sentiment bolstered by rate decisions

Westpac has revealed consumer sentiment is rising once again, lifting 6.2 per cent to 86 in February, up from 81 in January and its highest level since June 2022

The rise marks the biggest monthly gain since April 2023, when the Reserve Bank of Australia (RBA) paused its rapid series of interest rate rises.

Shifting expectations regarding interest rates in the upcoming year seem to be the main driver behind the slight uplift in consumer expectations, Westpac reported, as the expectation of rate cuts cements in the public’s psyche.

The Westpac-Melbourne Institute Index of Consumer Sentiment – based on 1,200 adults surveyed between 5-9 February 2024 – found that 44 per cent of consumers expect interest rates to remain stagnant or to lower in the next year, up from 33 per cent in January.

Expectations surrounding variable interest rates for the next 12 months declined 17.3 per cent to 121.6 basis points (bps), the lowest index score since August 2020.

Westpac noted, however, that the consumer mood “remains pessimistic” despite the slight gain in the overall index.

The major bank’s report showed that expectations around housing costs rose 2.1 per cent to 161.4 bps, marking a new cycle high.

More than two-thirds of consumers (69 per cent) expect house prices to continue to rise in 2024, the report revealed.

Westpac’s research showed that the “time to buy a dwelling” index rose 3 per cent to 74.2 bps, following the 3 per cent drop reported last month. The index returned to the 72–76 bps range which Westpac described as “very weak”.

The “time to buy a dwelling” index showed a boost in buyer sentiment in Victoria, rising 13.9 per cent to 78.1 bps over the last month. Similar trends were noted in Western Australia which boasted a 21 per cent increase in buyer sentiment, rising to 87.2 bps.

The rise in index was followed by a sharp 14 per cent decline to 64 bps in regional areas nationally.

Out of the 54 subgroup demographics that Westpac tracked, the only group to show a significantly positive view in the “time to buy a dwelling” category were those that owned investment properties. This group indexed at 106 bps, whereas all other groups had scores under 100 bps.

Speaking of the figures, Westpac’s senior economist, Matthew Hassan, said that “rate cuts will be effective in restoring sentiment and supporting demand.”

However, Westpac expects that the RBA will keep the cash-rate unchanged at the next RBA board meeting.

Mr Hassan continued: “While sentiment is still firmly pessimistic, there finally looks to be some light at the end of the tunnel for Australian consumers. Moderating inflation and shifting expectations for interest rates appear to be the main factors behind the lift, with some additional support coming from the prospect of broader income tax cuts later in the year. That said, responses over the course of the survey week suggest the rally is still very tentative with a sharp pull-back amongst those surveyed after the RBA’s February policy decision.

“All five component sub-indexes recorded gains in February, led by big improvements in buyer sentiment and expectations for the economy over the year ahead.”

Mr Hassan also emphasised that the “time to buy a major household item” sub-index surged 11.3 per cent to 86.8.

“This sub-index has been the main one to capture the impact of intense cost-of-living pressures over the last two years, with six of the weakest monthly reads on record,” he said.

“While the sub-index remains a long way below its historical average of 124.7, the February gain is the most promising sign yet that these pressures are finally starting to ease.”

However, the ANZ-Roy Morgan Australian Consumer Confidence also came out on Tuesday (13 February) and found that consumer confidence levels fell by 1.2 points in the last week (5–11 Feb).

ANZ reported that consumers paying off mortgages had a higher confidence last week, attributing this rise to the RBA holding the cash rate for the month of February.

ANZ’s senior economist, Adelaide Timbrell, said that while there was a decrease in confidence from consumers, the results were “still above all results from mid-February to December 2023”.

“ANZ-Roy Morgan Australian Consumer Confidence decreased last week but was still above all results from mid-February to December 2023.

“Short-term economic confidence rose to its highest level since April 2022, before the RBA hiking cycle began. Those paying off their homes had higher confidence in the week, presumably due to the RBA holding rates again in February, while outright home owners (who often benefit from higher interest rates) had slightly lower confidence through the week.

“The RBA board continued its tightening bias in its post-meeting statement and governor Bullock reiterated in the RBA press conference that the board was not ‘ruling anything in or out’,” she added.

[Related: Home buyer sentiment lifts in December: Westpac]