March rate cut more likely as time to buy house sentiment falls in January: Westpac
There was another disappointingly small rise in consumer sentiment in January as still cautious consumers shifting their preferences from buying houses to buying cars, the latest instalment of the Westpac- Melbourne Institute consumer sentiment index reveals.
Conducted between January 7 and 13, consumer sentiment rose 0.6% to 100.6 over the month, the third consecutive month when the index has been at or above the benchmark 100 point level.
Westpac chief economist Bill Evans described the January result as “disappointing” given that despite a total of 175 basis points of rate cuts from the Reserve Bank since October 2011 the index has only 3.5% over this time.
The ‘time to buy a dwelling’ sub-index fell 1.5% to 140 points to be up 6.5% year-on-year while the 'time to buy a car' index rose by 6.1% to 146.8 points, up nearly 15% year-on-year.
The weaker house buying sentiment is confirmed by a special question included in the current survey around the outlook for house prices.
Around 45.6% of respondents expect house prices to rise over the next 12 months, slightly less than the 46.9% of respondents that expected house prices to rise when asked the same question a year ago - this despite the cash rate having fallen by 125 basis points over this time frame.
Evans says positive news events - the rising share market and Australian dollar plus better offshore news - failed to move respondents who have become "more guarded around their own finances".
He also notes official ABS mortgage lending, which he says indicates that upgraders and investors are responding to the lower rates in a broadly comparable fashion to 2009.
“However, unlike in 2009, first-home buyers have been reluctant to return to the housing market.
“This is certainly partly due to less generous government subsidies but may also be impacted by weaker overall confidence around finances and job prospects,” he says.
Despite the disappointing January result, Evans says the bank remains of the view that there is a “clear case” for only one more rate cut in the cycle, with Westpac shifting its expectations to a March rate cut, having earlier said it could be February or March.
“The case for a further rate cut as early as the February meeting is still reasonable. Prints for employment and inflation over the next week will be important in this regard.
“However, a prudent Reserve Bank which has seen a resurgence in the terms of trade, is likely to defer in February to await further evidence around the impact of the rate cuts. Accordingly we have opted for the next cut in the March end of our forecast ‘window’,” says Evans.
Commonwealth Bank credit card figures pre and post-Christmas confirm that consumers remain cautious with much of the 4.2% rise in spending on CBA credit card over the 11 weeks to January 4 2013 (compared with a year ago) the result of a rise in spending on food and liquor.
Credit card spending on staples (food and liquor) rose 10.8% on a year ago – partially underpinned by improving inflation in addition to increased volumes while spending on discretionary items underperformed the over retail sector, rising just 1.5% over the 11 week period.
The figure are based on transactions of more than three million CBA cardholders with CommSec economist Savanth Sebastian saying the results suggesting that consumers remain “relatively cautious despite the multiple rate cuts provided late last year”.
“In fact spending growth amongst domestic firms rose by just 4.2% in the 11 weeks to January 4 compared with a year ago. And given this is nominal spending rather real spending (inflation adjusted) it highlights the tough environment faced by the retail sector,” he says.
Sebastian says that given the buzz and interest around Christmas retail activity the lack of discretionary spending “really speaks volumes about how tough the retail sector is doing it at present and that is despite a healthy period of interest rate cuts”.
“It is important to realise that while confidence levels have been rising in the past couple of months it is of a low base and the current level of consumer caution will take some time to thaw.“And given that retail activity was solely dominated by post-Christmas sales – with Boxing Day sales up 20% on 2011 - it is clear consumers are only being enticed by deep discounts. While for the retailers, activity seems to be skewed towards lower-margin transactions,” he says.
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