Consumer sentiment fell 4.1% in December in the week the Reserve Bank cut the cash rate to an emergency level setting of 3%, according to the latest Westpac Melbourne Institute Index of Consumer Sentiment.
This nearly reverses the 5.2% increase in the index in November with the index now 3.2% below its November 2011 level meaning there has been no overall improvement in consumer sentiment despite the cash rate falling 175 basis points over the past 13 months.
It follows the release of the NAB business survey yesterday, which found that business conditions were unchanged in November, but remain well below their long term average and at their lowest level since May 2009.
The only Westpac respondents to react positively to the rate cut were - not surprisingly - mortgage holders, where sentiment rose 4.4%.
The survey of 1,200 Australians was conducted from December 3 to December 9 December, with the RBA cutting the cash rate on December 4 and all the major banks and their subsidiaries (apart from ANZ) announcing they would pass on 20 basis points within roughly 24 hours of the decision.
Overall, the index fell from 104.3 in November to 100.0 in December.
The December result indicates a drop in confidence about the future with a 4.3% slump in confidence about economic conditions over the next 12 months and an 8.9% slump in confidence about economic conditions over the next five years.
In the home ownership categories, those that own their homes outrights were the most pessimistic with a 10.9% slump in this sub-index while renter sentiment fell by 9.1%.
Westpac chief economist Bill Evans called the December findings of the survey "a very surprising result”.
“When we saw the 5.2% increase in the Index in November, which came despite the Reserve Bank surprising by holding rates steady, it appeared that sentiment was finally starting to respond to the accumulated series of rate cuts since November last year.
“With that in mind it was therefore reasonable to expect that the Index would respond quite positively to the rate cut the Reserve Bank delivered last week.
“Instead the Index fell back to near its October level and is now 3.2% below its November 2011 level," he said.
Evans attributed the slump in confidence to consumers being influenced by reports in the media about economic conditions.
“In this survey we also receive a measure of the major news categories which influenced respondents and how each category was assessed.
“The news items which had the largest impact were around economic conditions. An impressive 60% of respondents recalled news items on the economy.
“Next most prominent were interest rates (28.9% of respondents); budget and taxation (20.7%); international economic conditions (20.6%); inflation (13.9%); and employment (11.9%),” he says.