Rate cuts stimulate consumer sentiment

By Steven Cross

Recent rate cuts by the Reserve Bank of Australia look to have boosted consumer confidence, an economist has said, pointing to the release of data which showed an improvement in sentiment in July.

The Westpac–Melbourne Institute Index of Consumer Sentiment increased by 3.7 points in July to 99.1, up from 95.6 in June.

Westpac's chief economist, Bill Evans, said after three months of rate cuts consumers are beginning to regain confidence.

"Finally we have some evidence that the Reserve Bank's policy of cutting the official cash rate by 125 basis points between November last year and June this year is starting to gain more positive traction with households,” he said.

Mr Evans however warned that the result are ‘far from convincing’ and should not spark speculation of a return to more normal levels over the months ahead. 

“The Index is now two per cent above its level in October last year prior to the beginning of the rate cut cycle. However it is still 4.1 per cent below the reading in November last year when households responded positively to the first rate cut in November,” Mr Evans said.

Since the positive response late last year, Australians have witnessed the economic meltdown of Europe which offset and positive impact of the rate cuts that followed.

“These ongoing concerns, particularly around the international economic outlook, continued to mute the impact of subsequent rate cuts in May and June," he said. "In fact, despite the cumulative cuts of 125 basis points we still have the situation that pessimists slightly outnumber optimists.”    

Other positive news that may have affected rising confidence includes petrol prices, which are down by seven per cent since the last survey, a stronger Australian dollar, which rallied from 98¢ to 102¢ versus the US dollar, and the sharemarket's recent improvement.

“However, disturbingly, the sub-index tracking respondents' outlook for their finances over the next 12 months is still 9.4 per cent below the level in October last year prior to the beginning of the Reserve Bank's rate cut cycle," Mr Evans said.

Rate cuts stimulate consumer sentiment
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