BILL’S BITES: Sentiment, Budget, rates

The Federal Budget appears to have been gone down well with consumers. 

The Westpac-Melbourne Institute Index of Consumer Sentiment, conducted from April 1 to 5 and released last week, rose a fairly muted 1.9 per cent to 100.7, from 98.8 in March. However, the survey detail suggests the Budget was well-received, sentiment amongst those surveyed post-Budget 7.7 per cent higher than sentiment amongst those surveyed pre-Budget – the most positive turnaround since we began tracking pre and post Budget responses in 2011.

In terms of the Reserve Bank and interest rates, the better response to the budget and some soothing words from RBA officials saw the market push back the probability of a cut to the cash rate to October, from August – when we have been expecting the event to occur.

However, this week’s release of the minutes of the April monetary policy meeting of the RBA Board were notable, providing the clearest signal yet that the Bank would be prepared to cut the cash rate.

Firstly, the minutes stated that “a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and via reducing required interest payments on borrowing, freeing up cash for other expenditure”.

The Board even sets out the conditions for a rate cut: “Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances.” 

While prospects for a policy response in May have disappeared, there is still ample time and data releases to justify our timing that there will be cash rate cuts in August and November.

And a key issue will be whether the boost to consumer sentiment from the Budget is sustained.


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