Westpac–Melbourne Institute Consumer Sentiment Index at its highest level since May 2022

Consumer sentiment has lifted to the highest level since 2022 showing Australians no longer fear the prospect of the RBA delivering an unwanted interest rate increase.

Consumers sentiment has improved and the prospect of a rate rise no longer spooks Australians. Picture: Chris Pavlich.

Consumer sentiment has increased to the highest level since the Reserve Bank delivered the first of a dozen interest rate rises in 2022 as interest rate cuts abroad and signs that inflation is moderating buoy households.

The Westpac–Melbourne Institute Consumer Sentiment Index surged 6.2 per cent in October, reaching 89.8, its highest level since May 2022 when the RBA lifted the cash rate from 0.1 per cent to 0.25 per cent.

While overall sentiment remains in pessimistic territory, Westpac says consumers are more optimistic than they have been in over two years, thanks to easing fears of further rate hikes and moderating inflation.

Westpac head of Australian macro forecasting Matthew Hassan said it was the most promising update seen over the cycle to date, with the Mortgage Rate Expectations Index dropping 14.1 per cent in October, now at its lowest level since the RBA’s easing cycle during Covid.

“Consumers are no longer fearful that the RBA could take interest rates higher. However, responses around family finances suggest progress on cost-of-living pressures – the main source of negative sentiment overall – is still slow,” he said. “Just over half of consumers now expect mortgage rates to be unchanged or lower over the year ahead, compared with about a quarter back in July.”

Continued pessimism from consumers comes as Australians spent a record $27.43bn on credit card purchases in August and many households appeared to be turning to credit to deal with cost-of-living pressures, according to the RBA.

The total value of personal credit card purchases increased by $814.3m, or 3.1 per cent, compared to the previous month, in seasonally adjusted terms. Easing rate rise fears drove a big lift in near-term expectations. The “economic outlook, next 12 months” subindex jumped 14.3 per cent to 92.8, and the “economic outlook, next five years” subindex rose 8 per cent to 97.8. Both subindexes are now slightly above their long-run averages – the first time since May 2022.

Mr Hassan said views on family finances showed more muted gains, with the family finances compared to a year ago and in the next 12 months both rising 2.8 per cent in October. “The picture here is still of intense cost-of-living pressures but with the forward view indicating consumers expect the situation to stabilise over the year ahead,” he said.

“Finances remain under pressure despite recent fiscal measures. Recent tax cuts, and a range of government measures aimed at easing energy, rent and transport costs, are providing some support.

Housing market sentiment also saw a modest boost. The “time to buy a dwelling” index rose 2.5 per cent to 78, marking the highest read since early 2023. State-specific factors influenced the gains, with Queensland and South Australia showing significant improvements because of government measures for first-home buyers. Conversely, Western Australia and Victoria saw declines from surging prices and recent tax changes. The rebound in figures came as a NAB survey showed that business confidence and conditions rose in September, giving hope of a soft landing for the economy.

Business conditions and confidence both rose three points in September to seven index points and minus-two index points respectively, according to NAB’s monthly business survey.

Reserve Bank governor Michele Bullock is not expected to increase the cash rates again this cycle. Picture: John Appleyard

Confidence remained weakest in the goods distribution industries – retail and wholesale – though retail, recreation and personal services improved. The rebound in conditions in the month was driven by manufacturing, recreation and personal services, retail and wholesale.

As the RBA’s November meeting approaches, the outlook on inflation will play a key role.

Mr Hassan expects the RBA to soften its messaging and relax its “hawkish” stance, providing further relief to consumers, although the road to recovery remains slow.

Originally published as Westpac–Melbourne Institute Consumer Sentiment Index at its highest level since May 2022