Economist predicts sharp recovery in sentiment once RBA cuts interest rate
There was a noticeable boost in household confidence in February, with the latest Westpac-Melbourne Institute consumer sentiment index reporting a 6% improvement this month – the strongest survey outcome since last April.
The index climbed to 86 from 81 in January, suggesting that while sentiment remains in a pessimistic range, it has returned to the mid-2022 levels.
The survey results showed improvements across all five index components, with the assessment of the current timing for purchasing major household items experiencing the most notable rise of 11%. This component had been particularly weak for the past year and a half, reflecting the cost-of-living challenges impacting consumers.
Moreover, there was a noteworthy increase in optimism regarding the economic outlook over the next year. This sentiment is driven by growing confidence in the management of inflation, potentially leading to future interest rate reductions by the Reserve Bank.
The anticipation of tax reductions starting July 1 is also gaining attention among consumers, while expectations for family finances in the upcoming 12 months remained moderate. However, there were slight improvements among lower and middle-income households, benefiting more from adjusted Stage 3 tax cuts, whereas high-income households showed a slight decrease in positivity.
The survey also revealed a distinct difference in sentiment before and after the Reserve Bank’s February interest rate decision. Respondents prior to the decision registered an index of 94.1, in contrast to a post-decision index of 80, demonstrating a significant 15% decline in sentiment.
“Taking a glass-half-full perspective, that could mean sentiment will recover quite sharply once we get a clear signal from the RBA that inflation is under control and their focus has shifted to the timing of rate cuts,” said Matthew Hassan (pictured above), senior economist at Westpac Group.
“Right now, consumers are about 50/50 on whether we see another rate rise, or they’re on hold before being cut over the next 12 months. That’s quite a big turnaround from three or four months ago.
“The bottom line is while we’re still at weak levels in terms of sentiment, and spending is likely to remain constrained in the near term, the detail is starting to show that we’re moving in the right direction.”
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