Larry Schlesinger | 14 November 2012

Consumer confidence soars to highest level since April 2011 but December rate cut still likely: Westpac

Consumer confidence soared to its highest level in more than a year-and-a-half in November but a cash rate cut is still likely on December 4, says Westpac chief economist Bill Evans.

The Westpac Melbourne Institute Index of Consumer Sentiment increased by 5.2% in November from 99.2 in October to 104.3 in November - its highest level since April 2011 when the cash rate was 4.75%.

The sub-index measuring whether now is a good time to purchase a dwelling remained unchanged, but at its highest reading since September 2009 of 139.8 (the index average is 122.5) following a jump of 9.6% last month.

Evans says despite no change over November to this sub-index, it is “still clearly signalling a boost to confidence around the housing market”.

“Even those folks who hold a mortgage increased their overall confidence reading by 2.9% despite the likely disappointment from the Reserve Bank’s decision,” says Evans.

Respondents were surveyed between November 5 and November 11 so “largely captured the impact on confidence impact on confidence of the Reserve Bank’s decision”.

However the index is up just 0.9% on a year ago following the first 25 basis point cut from the Reserve Bank on November 2 last year.

“In effect, the subsequent 125 basis points of rate cuts have only really now been successful in holding the index at that level which we reached in November last year,” says Evans.

He says the best policy for the RBA would be to cut the cash rate again on December 4.

“With private rates still comfortably above those levels of recent easing cycles it would be unfortunate if the RBA becomes over optimistic to the first sign that its policies are gaining traction.

“The Australian economy is facing uncertainty around the mining sector and with contractionary fiscal policy and a punishingly high Australian dollar, we need further rate cuts to help build on these early signs that lower rates are having an impact on households’ confidence," says Evans.

All components of the index increased in November with the biggest sub-index rise being for “family finances vs a year ago”, which lifted 11% to 91.8 above the historical average of 90 indicating an improved level of financial comfort among households.

However, confidence fell sharply by 5.2% in Western Australia, “the dominant resources state” and also fell by 8.7%, in South Australia “where ongoing disappointment around the cancellation of the Olympic Dam project may be a factor”.

“In contrast to this, confidence surged 14.2% in New South Wales where mining activity is less significant and, arguably, prospects are brightest for the property market,” says Evans.

According to Evans, the more likely explanation for the strong uplift in November is that “households are becoming more comfortable with the global outlook and are finally responding to the series of rate cuts”.

p top listings

Mezzo, Glebe | Village Life. City Style.