Consumer confidence has continued to rise, despite steady increases in the official cash rate by the RBA since October last year. With continued growth in the labour market and a higher Aussie dollar key to the result.
The Westpac-Melbourne Institute of Consumer Sentiment Index for March, which measures the perceptions of consumers towards their future prosperity increased by 0.3 points to 117.3, or an increase of 0.2% over the February result. Year on year, consumer confidence has increased 37.1 percent since last March, or 33.1 percent in trend terms.
Westpac’s chief economist Bill Evans said the result was positive, but indicated that further interest rate increases were likely to shake consumer confidence.
“We assess that the bank now believes that rates are only around 50 basis points below neutral and the urgency associated with the three consecutive moves between October and December last year has passed,” he said.
“The resilience of confidence and the continuing improvement in the labour market will be key factors emphasising to the board that policy still needs to be normalised reasonably quickly.”
Once the RBA neutralises rates by increasing them another 50 basis points, Evans believed rates are likely to remain steady over the longer term, with 6.9 percent being the psychological barrier at which consumers become very responsive to further interest rate increases.
“History suggests seven per cent is a significant threshold mortgage rate for consumers,” said Mr Evans.
“We may be nearing the point where confidence becomes much more sensitive to increases in interest rates.” he said. “As we saw in the last cycle, once the variable mortgage rate reached 7.25% households’ responses to rate hikes became much sharper.” he said.
“How consumer sentiment reacts in the months ahead will be a critical guide to whether policy tightening has passed this important threshold.”