Consumers hit by March rate hike: Westpac

By Matthew Henry

MELBOURNE: This month’s rate rise by the Reserve Bank may have finally put the brakes on consumer spending, according to a Westpac study, which shows a sharp fall in consumer confidence.

The Westpac-Melbourne Institute Index of Consumer Sentiment released this morning recorded a 9.1 per cent fall from February to March, from 97.4 points to 88.6 points, which a Westpac analyst claims is evidence of a growing gloom among consumers.

“This is an extraordinarily large fall,” said Westpac chief economist, Bill Evans.

“Even though the 9.1 per cent fall is around the three-year average (9.4 per cent) fall in the index following a rate hike by the Reserve Bank, this has come from a lower base and pushes the index to its lowest level since September 1993.”

In bad news for major appliance makers, the report revealed a 10.9 per cent drop in the number of households who thought now was a good time to buy a major household item.

Evans said the March rate hike was a big blow to consumer confidence and said this may signal an end to the current cycle of rising interest rates, which began in May 2002.

“The results from this Survey are very important,” said Evans.

“They indicate that the Reserve Bank’s last rate hike, combined with further independent moves from the mortgage lenders may have finally slowed demand such that inflationary pressures will ease.

"The last rate hike in a cycle will generally have a much bigger effect than the moves that preceded it. The rate hike in March 2008 appears to fit that profile. The Governor of the Reserve Bank opined in his last statement that the March move may have been enough to sufficiently slow demand in the economy. The evidence from the Consumer Sentiment Index is that he is probably correct," he said.

Banks may still raise their interest rates independently of the RBA, said Evans, but the pressure is off the board for now.

“We do not expect that the Bank will raise rates again in the cycle. However, inflation will remain uncomfortably high and generous tax cuts later this year are likely to significantly boost households. Interest rates are now likely to stay around these relatively high levels until the Bank feels confident that inflation pressures have eased significantly.

“That is not expected to occur before the second half of 2009 at the earliest.”

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