Consumer confidence lifts in August on back of recent RBA rate cuts

In a positive sign for growth prospects, optimistic consumers outnumbered pessimists in August, according to Westpac.

The survey was conducted around the RBA’s latest decision to cut the cash rate to a new record low of 1.5 per cent on August 2. (AAP Image/Mick Tsikas)

Consumer confidence improved in August on the back of the Reserve Bank’s latest move on rates, although the impact of rate cuts on sentiment appears to be waning.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose to 101 in August, a 2 per cent increase on July’s 99.1 reading.

The modest rise lifts the index to a level at which the optimists now outnumber pessimists, a robust sign for growth Westpac chief economist Bill Evans said.

“Overall the lift in the index is still consistent with an improved outlook for the Australian economy,” he said.

“Over the last 30 months there have only been eight when optimists have been in the ascendancy with three of those months figuring in the last four.”

The survey was conducted around the RBA’s latest decision to cut the cash rate to a new record low of 1.5 per cent on August 2, with the effect seen moderate compared to the 8.5 per cent jump in the index after the previous move in May.

Mr Evans said the discrepancy could signal that consumers are worried about what such low rates indicate about the strength of the economy.

“We have to accept that as interest rates go progressively lower some respondents, particularly those who may not have a mortgage, may become more unnerved about the signal that record-low rates is sending about the economy,” he said.

“For example, in today’s result, while respondents with a mortgage responded strongly, there was a 1.3 per cent fall in the confidence of those respondents who wholly own their properties.

“That negative might have been expected to be even bigger for respondents that have low debt and rely on interest income. However, the decision by banks to raise some term deposit rates following the RBA rate cut has instead given a notable boost — sentiment among retirees in particular posted a strong 7 per cent rise.”

Mr Evans said the contrast to May could also be tied to the fact the rate cut was widely expected in August, a decision from the banks not to pass on the full cut and a higher base of confidence ahead of the move.

Consumers are doubtful the Reserve Bank has more ammunition to use over the coming year, with 37 per cent expecting rates to actually rise, as against just 27 per cent tipping a further decline.

That represents a divergence from market expectations, with analysts and futures pricing tipping at least one more cut over the next year.

The latest action from the RBA did, however, boost confidence in the housing market, with more people seeing now as a good time to buy a house.

“Westpac’s index of ‘time to buy a dwelling’ rose by 10.1 per cent to be up by 9.2 per cent over the last year,” Mr Evans said.

“The Westpac Melbourne Institute House Price Expectations Index was basically flat for the month but, consistent with the ‘time to buy’ index is signalling considerably more confidence than we saw at the start of the year.”