Consumer confidence bounces with stage 3 tax cuts

Households are feeling better about their finances as stage 3 tax cuts begin to flow through to pay packets, but the joy may prove short-lived if next week’s inflation data raises the chances of an interest rate increase.

Consumer confidence rose 5.9 percentage points to a six-month high of 84.4 per cent last week, according to ANZ-Roy Morgan data.

Consumer confidence has bounced as households take home more pay, but next week’s inflation figures could reverse that trend.Credit: Penny Stephens

ANZ economist Madeline Dunk said it was one of the biggest weekly increases in confidence since April 2021 and was spread over several categories.

There was a particularly strong rise in households’ confidence in their current financial situation.

“That’s at its second-highest level since early 2023, and maybe alludes to the fact that households are actually starting to feel the benefits of those stage three tax cuts,” Dunk said.

“We’re halfway through July. A lot of people will have had at least one pay come into their bank [account] that’s a bit higher than it was in June, and today’s numbers suggest that maybe that’s flowing through to confidence.”

While confidence is at a six-month high, Dunk said it remained quite fragile and well below the average since 1990.

“It’s still very low, it’s incredibly weak, just reflecting the fact people’s budgets are being squeezed,” she said.

Given that the weekly measure is volatile, Dunk said the big question was whether a sustained increase would occur.

One factor that could hurt confidence is June-quarter inflation data, which will be published before the Reserve Bank board’s August meeting. It will be critical to the board’s considerations about whether to keep the official cash rate at 4.35 per cent or lift interest rates by 0.25 percentage points. Financial markets are pricing in a 25 per cent chance of a rate rise next month.

Inflation was 3.6 per cent in the year to March, but has risen since then, according to the more volatile monthly figures, to 4 per cent in the year to May.

Economists and the Reserve Bank expect inflation to be higher in the June quarter than the previous one, but the key will be just how high.

“If you see a really strong number next week, and you see more and more talk about the potential for the RBA to hike rates, that’s definitely likely to sap confidence,” Dunk said.

However, household finances are in reasonable shape.

Savings remain high and above pre-pandemic levels, according to Commonwealth Bank’s household indicator data, despite signs households have used some of their savings over the past year.

Households have continued to reduce spending as mortgage repayments and rents have soared, and the bank’s senior economist, Belinda Allen, said housing costs would continue to rise in 2024 as the tail end of low-interest fixed-rate mortgages rolled over and rents kept growing.

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