Australian Consumer Morale Drops Over Rising Interest Rates

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Consumer confidence in Australia pulled back sharply in May, a key survey showed, suggesting that consumers were discouraged by rising interest rates. Meanwhile, separate data showed that wages in Australia rose at the fastest pace in more than a year in the first three months of 2010.

The Westpac - Melbourne Institute consumer confidence index slid 7% to 108 in May from 116.1 in the previous month. A reading above 100 means optimists outnumber pessimists.

The survey was held after the release of the Federal Budget and the Reserve Bank of Australia's latest rate hike, and Westpac chief economist Bill Evans said both had a strong downward influence on consumer morale.

Earlier this month, the RBA raised interest rates by 25 basis points to 4.50%, the sixth such increase in the past seven meetings. "This result indicates that the response to the Budget was negative on balance but we expect that the most important factor causing such a large fall in the headline index was the rate hike," said Evans.

He said interest rates had reached the range where any further rate hikes were going to hurt consumer sentiment. Confidence of respondents with a mortgage fell by 8.1% in May compared with average falls of 2.3% in response to the five previous rate hikes.


Four of the five components of the confidence index declined in May. Consumers' perception of economic conditions in the next 12 months slumped 17.3%, while the measure of consumer perception regarding the economic outlook for the next 5 years was down 10.6%. Expectations for family finances over the next 12 months also fell by 3.6% and the gauge of whether now is a good time to buy major household items fell by 3.4%. On the other hand, assessments of consumers' family finances compared to a year ago rose by 2.6%.

Evans said other factors that usually prop up consumer sentiment were also weak in May. Since the preceding survey, the share price index fell by 6.8%, while the Australian dollar had fallen 4.2%.

The RBA is now set to take a wait and watch stance and pause the monetary tightening cycle, according to Evans. "Interest rates are starting to bite," he said. "That has been apparent for some time with retail spending and housing finance and even employment growth slowing down." Evans expects bank to make its next move in August, following the release of the June quarter inflation data.

Separately, the Australian Bureau of Statistics said today that the country's wage price index grew by a seasonally adjusted 0.9% in the March quarter compared to the preceding three months. This is slightly above analyst forecasts for a 0.8% increase and follows a 0.6% increase in the December quarter. It also marks the fastest rate of wage growth since the December quarter of 2008, when wages increased 1.2%.