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BILL’S BITES: Sentiment, Budget, rates

11:17am April 18 2019

Westpac chief economist Bill Evans discusses consumers' response to the Federal Budget and the RBA cash rate. (Josh Wall) 

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.

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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