Consumer confidence data shows the Reserve Bank needs to move with interest rate cuts

Even with unemployment near historical lows, Australian households are crying out for interest rate relief as economic growth stalls and confidence is stuck in pessimistic territory.

Although above its pandemic-era lows, the Westpac-Melbourne Institute index has been at a “pessimistic” level for more than three years. Picture: Lyndon Mechielsen

The latest consumer confidence data shows Australian households are still desperately in need of interest rate relief, regardless of what the unemployment figures might suggest.

Unemployment is historically low at about 4.1 per cent, but consumer sentiment is stuck in pessimistic territory. Although well above its pandemic-era lows, the Westpac-Melbourne Institute index has been at a “pessimistic” level for more than three years and the rebound has stalled since November.

When the Reserve Bank last week surprised markets by keeping rates on hold, confidence took an immediate hit and fell from what would have been 95.6 before the announcement to just 92.

After more than three years of interest rate pain and the longest stretch of consumer pessimism outside of recessions, families are running out of patience with the RBA’s cautious approach.

The RBA board wanted “a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis”. But its hesitation is puzzling given the weak economic backdrop.

That’s particularly so given the board’s shift in “priority” over the past two months from “sustainably returning inflation to target” to “maintaining price stability and full employment” – and the fact that the cash rate target is only just back down to the top of its range of “neutral” estimates.

Economic growth ground to a near standstill in the March quarter, highlighting the urgent need for monetary policy support. The RBA has made progress on inflation and the CPI is now tracking closer to the midpoint of the 2-3 per cent target range.

But this success has come at a significant cost to household spending and confidence. Family finances are under severe pressure and households are still worse off than in 2020. Price levels have surged 20 per cent, outpacing wage growth of 15 per cent.

The unemployment rate is only slightly above a record low of 3.5 per cent seen during the pandemic. At least on paper it’s easy to get a job. Labour force participation rates are near record highs, but that’s partly because household budgets have been squeezed so much that more people than ever need to work to make ends meet.

What’s particularly concerning is how sensitive consumer confidence has become to the RBA’s every move. Housing sentiment, already weak, deteriorated further after July’s surprise hold decision.

The “time to buy a dwelling” index dropped 5.1 per cent, while house price expectations also fell.

The economic logic for rate cuts continues to be compelling. Consumer spending, which makes up about 60 per cent of the economy, needs support.

To some extent Australia’s weak March quarter growth performance – which came before US President Donald Trump unleashed the current trade war – showed what happens when household confidence remains depressed for extended periods.

Business investment and employment may look healthy now, but they won’t stay that way if consumer demand continues to languish.

Encouragingly, there are signs that rate cuts, when they do come, will have an immediate positive impact. Even after July’s disappointment, most still think mortgage rates will be lower in 12 months.

The mortgage rate expectations index hit a 13-year low, suggesting households are optimistic about the medium-term direction of policy.

The RBA’s own messaging has supported this view. In her press conference last week, Ms Bullock said the decision to leave rates on hold was “about timing rather than direction”.

The board was “looking or confirmation” that its inflation forecasts are on track.