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Rate rise to blame for consumer sentiment drop

According to the Westpac–Melbourne Institute Consumer Sentiment Index, consumer sentiment fell by a staggering 7 per cent in May, following rising rates and the release of the federal Budget this month.

The Index fell from 116.1 in April to 108.0 in May, but rising rates – not the budget, seemed to host consumers' biggest concerns.

Confidence among respondents who had a mortgage fell by 8.1 per cent in May, compared with average falls of only 2.3 per cent in response to the five previous rate hikes.

Westpac chief economist Bill Evans said the 25 basis point increase in the Reserve Bank’s official cash rate, rather than the release of the federal Budget, was the key contributor to the fall in consumer confidence.

According to the Index, on the question of whether the federal Budget would impact family finances over the next 12 months, most respondents (51 per cent) said it would have little impact, while 27 per cent indicated that their finances would worsen as a result of the Budget.

Meanwhile, 11 per cent indicated that finance would improve and 10 per cent were unsure.

“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,” Mr Evans said.

In the last rate hike cycle, sentiment was most affected when in March 2005 when the mortgage rate was increased from 7.05 per cent to 7.3 per cent, according to Mr Evans.

“The Index fell by 15.5 per cent and, following the seven subsequent rate hikes in that cycle, the average fall in the Index was 8.5 per cent,” he said.

According to Mr Evans, interest rates are clearly back in the range for the variable mortgage rate where future rate hikes are going to hurt consumers. He said the Index can be expected to respond accordingly.
Source The Advisor