Consumer sentiment holds up after rate rise

According to the Westpac-Melbourne Institute, it seems consumers have not lost confidence in the economy after a fourth interest rate rise. The Consumer Sentiment Index increased by 0.2 per cent in March.

Westpac Chief Economist, Bill Evans, said this is a good result considering the latest interest rate movements.

“This is a solid result given the backdrop of a fourth official rate rise. However the previous rate hike cycle and the March sentiment reading suggests mortgage rates have not reached the point where increases have a major impact on confidence,” he said.

“Since the last survey the Reserve Bank raised the overnight cash rate by 0.25 per cent from 3.75 per cent to 4.0 per cent and the banks increased their variable mortgage rates by an equivalent amount. The variable mortgage rate is now averaging around 6.9 per cent.”

According to Evans, if the mortgage rate rises above 7.0 per cent, we may see a significant drop in confidence.

“History suggests 7 per cent is a significant mortgage rate for consumers. When the RBA increased the cash rate, by 0.25 per cent in March 2005, the variable mortgage rate rose to 7.3 per cent and confidence plummeted by 15.5 per cent,” he said.

“Over the 2006-2008 period the bank increased the overnight cash rate on seven further occasions in tranches of 0.25 per cent with the variable mortgage rate reaching 9.35 per cent in march 2008. The average fall in the Index following each of those rate hikes was 8.5 per cent.”

“Based on the evidence alone we may be nearing the point where confidence becomes much more sensitive to increases in interest rates.”

Evans was concerned that the results could also be much worse this time around, due to consumers having significantly more debt than in the past.

“Of course households are holding significantly more debt than during the last period. Debt to income ratios are around 20 per cent higher today than they were in 2003. That may make them more sensitive to rises this time around,” he said.

Evans expects the RBA to hold off on increasing rates when it next meets on 6 April. He expects another 25bp rate hike at the following meeting on 4 May.

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