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Interest rate worries hit confidence

Consumer sentiment has fallen, despite historically low unemployment and steady interest rates, a survey shows.

Worries about rising interest rates may be restraining consumer sentiment, despite a run of strong economic growth figures, with respondents less confident about buying a house.

But the overall index was still high, with economists crediting Treasurer Peter Costello's May budget tax cuts.

The Westpac-Melbourne Institute index of consumer sentiment fell by 2.4 percentage points in June to 121.5 points, from 123.9 in May, on a seasonally adjusted basis. Still, the score, based on a survey of 1400 people in early June, was close to its record of 127.7 set in January 2005.

It was also 17.7 points higher than a year ago. A reading above 100 indicates consumers are optimistic.

Westpac chief economist Bill Evans said the latest fall was not surprising after it surged 7.5 points in May. "Some statistical correction was always likely this month," Mr Evans said.

RBC Capital Markets senior economist Su-Lin Ong said news that the seasonally adjusted jobless rate for May had fallen to 4.2 per cent, its lowest level since November 1974, was underpinning consumer confidence.

The consumer sentiment index is above the levels recorded before the Reserve Bank of Australia raised interest rates three times in 2006, bringing the official cash rate to its highest since August 2000.

"The proof is ultimately in the pudding, with private consumption stepping up in 2007 and underpinning activity," she said.

The RBA's decision this month to leave interest rates steady has not encouraged more confidence in bricks and mortar, with the "time to buy a dwelling" index down 2.7 per cent since March and 13.7 per cent lower than a year ago.

"Confidence in housing seems to be critically influenced by affordability and the 8.6 per cent rise in house prices over the last year was probably the key factor," Mr Evans said.

Views on whether now was a good time to buy a household item fell by 3.3 per cent in the year to June.

Conversely, the "time to buy a car" index rose by 9.2 per cent in the same period. "Despite the rise in petrol prices, consumers remain relatively positive towards purchasing a motor vehicle," Mr Evans said.

CommSec equities economist Martin Arnold said despite higher petrol prices, consumers saw better economic times ahead as household incomes rose.

JP Morgan economist Helen Kevans said higher fuel prices and a fall in housing affordability to near record lows might have weighed down the index in June.

Source: Sydney Morning Herald, June 2007

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