The Reserve Bank’s decision to leave interest rates on hold for a second month in a row has done little to lift the gloom hanging over consumers.
The Westpac Melbourne Institute consumer sentiment index dipped 0.4 per cent to 81.0 in August from 81.3 in July, to remain at levels consistent with past recessions. It means that pessimists outnumber optimists by nearly 20 per cent.
The survey pointed to limited impact from the RBA’s decision to pause. Responses showed no improvement over the course of survey week. In fact, sentiment declined by 4.9 per cent between those surveyed prior to the RBA decision and those surveyed after.
The weakness can be partly explained by doubts about how long this rate pause will last. Westpac economists see this as the end of the tightening cycle, but consumers are less convinced.
About two thirds of survey respondents expect interest rates to rise further over the next 12 months, while a third are bracing for a rise of over one percentage point. This is a similar mix to what we saw back in April, even though we've had clearer signs of an improvement around inflation since then.
Still, it looks like inflationary pressures on incomes are still the dominant factor for consumers. Since the July survey, petrol prices have risen and the latest round of electricity price increases have also fed through.
For consumer sentiment to recover significantly from here, we'll need to see more convincing signs that inflation is easing in people's day to day lives, and that may not be happening just yet.
On a more positive note, the survey showed an improvement in confidence around family finances. That looks to be due to the improvement in housing markets, while responses around the labour market also picked up.
In housing, we’re seeing acute tension between buyer sentiment and price expectations. Affordability for buyers is already pretty bad and deteriorating every time prices move higher. That said, there also seems to be an element of FOMO - fear of missing out - flowing through to some markets, especially the ones that are seeing the biggest price gains.
Overall, the positive news for the RBA is that spending does not look like suddenly bouncing back following two months of rates on hold. More likely, we’ll see the consumer continue to keep tightening the purse strings into the back end of 2023.
For the full report, visit WestpacIQ.