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Dropping consumer confidence may keep rates low

By Stefanie Garber
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As consumer confidence plummets in the wake of the federal Budget, several economic observers have predicted rates will remain on hold until well into next year.

 

Louis Christopher, managing director of SQM Research, predicted softened consumer sentiment could push back any rate hikes.

“The Budget has delayed any rate rises for at least the next 12 months, if not longer,” he said.

Latest consumer sentiment figures from Roy Morgan show confidence dipped into the pessimistic zone this week for the first time since May 2009.

“The ANZ-Roy Morgan weekly consumer confidence index declined further last week after falling sharply in response to news related to the Commonwealth Budget,” Roy Morgan head of Australian economics Justin Fabo said.

John Caelli, general manger at ME Bank, also believes rates will hold steady for a prolonged period.

“We don’t see rates increasing until at least the first quarter of 2015,” he said.

He said a number of factors suggest the economic recovery would benefit from a delayed rate hike.

“Inflation is within the target zone, so the RBA can afford to wait and see the recovery unfold, noting economic growth continues to be below average, the transition to non-mining economic activity has further to go, and there will be some fiscal contraction from the Budget,” he said.

While low rates are good news for many investors, Mr Christopher warned lowered confidence levels could weaken the housing market.

“It is clear the government's goal to return to surplus and cut back expenditures has had a negative impact upon consumer sentiment, which if it lasts will be negative for the housing market,” he said.

“Having such a benign outlook on interest rates is a positive for the market but it won't entirely offset the negative impact of a much softened view on the economy.”

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