The Westpac Melbourne Institute consumer sentiment index jumped 9.4 per cent in April after the Reserve Bank offered mortgage holders some relief by keeping the cash rate on hold.
At 85.8, the index reading is still well below 100, indicating that consumers remain deeply pessimistic, but at least I think we’ve now seen the bottom.
Confidence among people with a mortgage surged by 12.2 per cent, underlining the positive response to the RBA’s policy pause, which followed 10 consecutive rate hikes.
There was also a 12 per cent rise in the outlook for family finances and a 10 per cent improvement in how people feel about their finances relative to a year ago.
One disturbing aspect was that even though we had a 9.5 per cent increase in people seeing now as a good time to buy a major household item, that’s still below the low point seen during the deep recession of the early 1990s. So the prospects for spending remain constrained.
More than a third of survey respondents still expect interest rates to rise by more than 1 per cent over the next year and, while that number has reduced in recent months, it points to ongoing nervousness around the outlook for rates.
As such, we continue to see a lacklustre outlook for consumer spending for the rest of the year and the first half of 2024.
The prospects for the housing market are looking a lot rosier, with the house price expectations index surging by more than 16 per cent. It’s now 43 per cent above the low point we saw back in November and only 2 per cent below the level before the Reserve Bank started raising interest rates last year.
This suggests that, in response to the rate pause, Australians are becoming more interested in the idea of investing back in the property market, and that’s something we’ll be keeping a close eye on over the next six months.
Over the last few weeks, we argued strongly that the Reserve Bank would pause at the April board meeting. We're less convinced that the pause will continue in May.
There's a lot of data for the Board to look at, particularly around inflation, where quarterly data later this month will give members a more accurate measure than the monthly reports that can be quite unreliable in terms of underlying inflation.
With signs emerging that the housing market is starting to recover quickly, we think the RBA’s best policy would be to go for one final cash rate increase in May. But we’ll be watching the data closely in case it argues for the pause to be extended.