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8 February 2006

Consumer Sentiment registers small rise

The Westpac Melbourne Institute Index of Consumer Sentiment rose by 1.8% in February from 107.4 in January to 109.3 in February.

Westpac's Chief Economist, Bill Evans, commented: "It appears that after a particularly volatile year in 2005 for Consumer Sentiment we may be entering steadier times in 2006. This slight increase follows a similarly modest rise of 2.6% last month. That compares with average monthly moves of 5.9% in absolute terms in 2005.

"If the Index does stabilise in the 100 – 110 range, then the message will be clear. The days of the over-zealous consumer have passed when the Index averaged 114 in 2003 and 2004. We remain in a period characterised by a conservative consumer, and will stay that way for some considerable period.

"However, given households' high levels of debt and sensitivity to interest rates, this "calm" would be dramatically disturbed if interest rate concerns returned. Next week the Reserve Bank will release its February Statement on Monetary Policy. It is expected to maintain its "tightening" bias, although recent inflation and employment trends will make it difficult for the Bank to sustain a strong argument.

"Last month we noted that Consumers appear to have become much less sensitive to petrol prices. That still seems to be the case with a 6% rise in prices since the last Sentiment Survey, failing to inspire much reaction. Moreover, with Sentiment at 109.3, this is the highest reading since August of last year, just prior to the record spike in petrol prices. Petrol prices are now only 8% below their September record average but consumers appear now to have adjusted to an environment of higher prices.

"One undoubted positive for Sentiment would have been our continuing strong equity market. Since the last Survey, the market hit a record peak on six separate occasions and is now around 2.4% higher over the past month.

"The subcomponents of the Index were also subdued. "Family finances compared to a year ago" was unchanged, "expected family finances over the next year" was up by 1.4%, the volatile "economic conditions over the next 12 months" improved by 3.4%, "economic conditions over the next 5 years" rose by 0.7%, and whether now is a "good or bad time to buy a major household item" rose by 3.0%.

"No one would have been surprised by the RBA's decision to hold rates steady following yesterday's Board Meeting. This is consistent with the theme of steady rates we have been promoting for the last year. Expect that to continue in 2006 until softening global economic conditions see rates coming down in the first half of 2007," Mr. Evans said.

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are selected at random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted on 1 - 5 February. The data have been weighted to reflect Australia's population distribution. Copyright at all times remains with the Institute of Applied Economic and Social Research.