Westpac consumer sentiment jumps 9.4 per cent in April after Reserve Bank keeps rate on hold

Australians are feeling the most optimistic about the nation’s economy in nearly a year after the Reserve Bank ended the most aggressive rate rising cycle in history.

Consumer sentiment has jumped sharply to its highest level since June after the Reserve Bank paused interest rate hikes and ended the most aggressive rate rising cycle in history.

The Westpac-Melbourne Institute Consumer Sentiment Index increased by 9.4 per cent to 85.8 in April, up from 78.4 in March.

Westpac chief economist Bill Evans said the bounce in sentiment came amid the RBA’s April 4 decision to keep rates on hold.

“This strong recovery in the Index can be largely attributed to the decision by the board of the Reserve Bank to break the sequence of 10 consecutive meetings when the cash rate was increased by deciding to pause at the April meeting,” he said.

“While this tightening cycle has been unique in terms of ten consecutive meetings of rate increases the most comparable period was October 2009 to May 2010 when the board increased rates at every meeting apart from the February meeting.”

Mr Evans said confidence was at its highest level since June 2022, although remained 10.4 per cent below April 2022 – the month before the RBA board started raising the cash rate.

“Despite this lift in April, we still characterise Consumer Sentiment as weak and consistent with Westpac’s view that consumer spending through 2023 and at least the first half of 2024 will be lacklustre,” he said.

However, consumers remain apprehensive about interest rates, with 34.1 per cent of people surveyed expecting the standard variable rate to be raised by more than 1 per cent over the next 12 months.

It mirrors concerns by RBA Governor Philip Lowe, who this month warned the central bank expected “some further tightening of monetary policy may well be needed” to ensure that inflation returned to its target band of 2-3 per cent.

Confidence among respondents with a mortgage lifted sharply by 12.2 per cent, although it remains 14.5 per cent below its level before the tightening cycle began.

Mr Evans noted underlying inflation was likely to remain between 6.5 per cent and 7 per cent in May, while the unemployment rate holds at a near 50-year-low.

“Westpac expects that a final 0.25 per cent increase in the cash rate at the May board meeting remains the best policy approach rather than awaiting even more information and risking even higher rates later in the cycle,” he said.

Separately, business conditions eased two points to +16 in March, remaining well above the long-run average – according to NAB’s Monthly Business Survey released on Tuesday.

Employment eased two points to +10 and profitability was down one point to +13, while trading conditions were flat, but above elevated at +26 points.

“Business conditions have been resilient, slowly edging lower over the past few months but remaining well above their long-run average,” NAB chief economist Alan Oster said.

“Trading conditions are particularly elevated, indicating that businesses continue to experience strong demand, and conditions are generally strong across states and sectors.”

However, business confidence rose three points to -1.

“Confidence appears to have stabilised, but it remains below average at -1 index point.” Mr Oster said.

“Confidence was particularly poor in retail and wholesale, likely reflecting that firms are concerned about how much longer consumer spending will hold up.”