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Consumer sentiment slumps as RBA interest rate rises bite

Westpac–Melbourne Institute’s Consumer Sentiment Index slumped a further 5.7 percent in June after falling 7 percent in May, with interest rate pressure starting to mount on consumer’s confidence.

Consumer Confidence RBAThe Westpac-Melbourne Institute Consumer Sentiment Index’s fall of 5.7 percent in June took the index from 108.0 seen in May down to 101.9. Economists see the fall in consumer confidence as evidence that the Reserve Bank of Australia’s interest rate increases over the past 9 months are starting to bite, despite the RBA electing to keep rates on hold at the June RBA Board meeting.

Westpac’s Chief Economist, Bill Evans is concerned about the recent slump in consumer confidence.

“Following the 7% fall in May, the cumulative 12.3% fall in the Index over the last two months represents the largest two month fall since March 2008. At that time the Reserve Bank had raised rates on two consecutive occasions pushing the variable mortgage rate to 9.35% and the global financial crisis was deepening.” Mr Evans said.

“We expect that the fall in May was largely due to the Reserve Bank’s decision to raise rates for the third consecutive month this year. With the Bank leaving rates on hold in June, the decline in sentiment this month may not be due to rates. Instead it seems to reflect a mixture of concerns about deteriorating conditions abroad, financial market turmoil and uncertainty around the Government’s proposed Resource Super Profits Tax.” Mr Evans said.

Westpac’s Bill Evans sees the RBA keeping rates on hold at the July Board meeting, but inflation data released in late July will be the determinate of whether the RBA will act to increase rates in August.

“The Reserve Bank Board next meets on July 6. Clearly we are not changing our view that rates will remain on hold following that meeting. The next significant meeting will be on August 3. At that meeting the Board will have received an update on inflation. We know that with limited spare capacity in labour and housing markets, inflation pressures are building.”, Mr Evans said.

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David Olsen

David Olsen

An undercover economist and a not so undercover geek. Politics, business and psychology nerd and anti-bandwagon jumper. Can be found on Twitter: <a href="http://www.twitter.com/DDsD">David Olsen - DDsD</a>

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