Falling consumer confidence points to May rate cut

Consumer sentiment fell from 99.5 in March to 96.2 in April, and is still less than 99.7 recorded 12 months ago, according to a Westpac and Melbourne Institute index.

“We would have preferred to have seen some upward momentum in the index going into the important Commonwealth Budget that will be released next month,” chief economist Bill Evans said.

“Indeed, recognition that the next Budget is imminent may have contributed to this month’s weakening in confidence.”

However, Mr Evans said there were other factors behind this result, one of them being the rise in petrol prices since February.

“In November, pump prices averaged $1.32 per litre. They fell to $1.10 by February but have increased to $1.34 by April,” he said.

“Recall that we partly attributed the eight per cent jump in the confidence index in February to the sharp fall in petrol prices.”

According to Mr Evans, markets gave a probability of around 75 per cent to the Reserve Bank cutting the cash rate in April.

He said that failure to deliver on expectations, including widespread media speculation, would also have hindered confidence.

“High-profile coverage of the sharp fall in the iron ore price would also have been significant,” Mr Evans said.

“The 21-per-cent fall in the price of Australia’s premier export commodity since the start of the year would have undermined households’ confidence.”

Mr Evans added that the drop in consumer confidence supports the cause for a further rate cut.

“We are extremely confident that the bank will finally deliver the much-anticipated second cut of 25 basis points on 5 May,” he said.