The Westpac Melbourne Institute Consumer Sentiment Index rose by 5 per cent to 84.3 in January, from 80.3 in December, the biggest increase since April 2021.
The index has lifted by a cumulative 8.1 per cent over the last two months, from a 78 read in November that may prove to be the low point in this cycle.
The main driver for the improvement was interest rates. Consumers have been responding to rate hikes from the Reserve Bank every month since May last year, but in January there was no increase, offering some temporary relief to borrowers.
Of course, that was because the RBA board did not have a meeting and we expect to see a return to those rate rises again in February, with another 0.25 per cent increase.
Overall, sentiment remains in deeply pessimistic territory and we have to go back to the deep recession of the early 1990s to see a run of numbers that are below the current series.
Still, there are signs that consumers can see some light at the end of tunnel. Confidence among mortgage holders rose by 10.7 per cent and the proportion of respondents who expect rates to go up by more than 1 per cent in the next 12 months has fallen from 60 per cent to 48 per cent.
I would expect that proportion to continue to fall because Westpac doesn't see interest rate increases of more than 1 per cent going forward.
We also saw an improvement in the outlook for the labour market returning to near record high levels of confidence.
The outlook for house purchase conditions fell by 4.4 per cent but remains in the 75 to 80 range where it's been stuck since March last year.
Finally, the index for house price expectations sits at 104. That's above the 100 level which tells us that respondents believe house prices are more likely to rise than fall over the next 12 months. That’s an interesting result, and something we’ll need to keep a close eye on.