Consumer confidence falls 1.3% as interest rate fears loom

Consumer confidence has taken another dip in May with Australians largely concerned over the possibility of another interest rate rise and how this would impact on their household finances.

According to the latest Westpac-Melbourne Institute Index of Consumer Sentiment, which dropped by 1.3% to 130.9 points in May, consumers are now more worried about their family finances than in the past.

“The Family Finances component of the Index is signalling a more disturbing picture of the household sector than the overall index,” Westpac chief economist Bill Evans said in a statement.

“For example, the overall index is 17% higher than the average read in 2008, whereas the Family Finances index is 6% lower than its average in 2008.”

The family finances index is now at its lowest point since July 2008, and there has only been one other result which has been lower than the early 1990s, during which “families struggled in the aftermath of Australia’s last recession”.

The culprit seems to be interest rates. After the Reserve Bank held off from raising the cash rate in May, minutes nevertheless indicated the bank would take a more reactionary stance.

“This change prompted a number of commentators, including Westpac, to move forward their forecast timing for the next rate increase to next month. Coverage of that development may have unnerved consumers.”

The Federal budget also seems to have had an impact, with Evans saying a special question in this survey seemed to indicate consumers believe the budget may have an impact on their own finances.
In fact, the survey shows 36% of respondents say the budget will worsen their finances, and only 7% believe they will improve.

But there are some aspects of the economy that continue to perform quite well. The outlook for economic conditions over the next five years rose by 3.5%, while the one-year outlook dropped by 3.2%, while the index for whether now is a good time to buy a household item increased by 1.7%.

The strength of the Australian dollar has also provided some consumers with reason to cheer, with Evans saying the dollar’s “associated impact on the prices of imported goods may explain why respondents see buying opportunities although concerns… are holding back purchases”.

With regard to future monetary policy, Evans says a rate hike next month would be a “brave decision”. He also points out that over the last decade, the RBA has only raised interest rates once when the Consumer Sentiment level was below the current index.

And while Evans says the Bank may be more likely to raise rates next month – based on stronger rhetoric from RBA governor Glenn Stevens – he says that such a move wouldn’t prompt another set of rises until mid-2012.