Australians are feeling optimistic again because the RBA may cut rates

Aaron P. Bernstein / Getty Images
  • Australian consumer sentiment rebounded strongly in February after falling to multi-year lows a month earlier.
  • Expectations that the RBA may cut rates again was cited as a catalyst behind the sharp improvement.
  • Views on family finances and the economy rose strongly, led by mortgage holders. However, sentiment towards spending remained subdued.
  • The proportion of Australians who believe unemployment will fall over the next 12 months rose to the highest level in seven years.
  • In contrast, views on the outlook for home prices plunged to the lowest level on record.

Australians, particularly mortgage holders, felt a lot more optimistic in February because a possible slowdown in the economy may force the RBA to cut rates again.

The Westpac-MI index rose 4.3% to 103.8, recovering after falling to a multi-year low in January.

A reading above 100 indicates that optimists outnumbered pessimists in the latest survey.

Westpac Bank

“Sentiment has recovered after a shaky start to the year,” said Matthew Hassan, Senior Economist at Westpac.

“The February lift takes the Index back into ‘cautiously optimistic’ territory.

“While that may indicate some of last month’s decline was holiday season noise, the survey detail suggests the Reserve Bank’s recent shift in tone has also played a part.”

During the survey period, the RBA acknowledged that risks to the domestic and global economies had increased since late last year, seeing the bank drop its reference to the next move in the cash rate as likely to be higher.

It described the risks to the next move as evenly balanced, and downgraded its expectations for GDP growth, unemployment and inflation in the years ahead.

The shift to a neutral policy bias from the bank saw financial markets move to fully price a rate cut by the end of this year, with a small risk of a second cut also seen in 2020.

Hassan said responses from survey participants suggests the prospect of rate cuts helped boost sentiment levels this month.

“We get a clear picture of how this has impacted consumer expectations from an additional question, run every six months, on respondents’ outlook for mortgage interest rates,” he said.

“Back in August, about half of Australians expected rates to rise over the next twelve months. That proportion fell to just below 43% in this month’s survey, the lowest reading since August 2016, the last time the RBA cut official interest rates.

“The February survey also showed a strong 7.4% lift in sentiment amongst consumers with a mortgage, another indication that diminished rate rise fears have been a support.”

The lift in sentiment among mortgage holders was replicated in each of the survey’s five subindexes in February, as seen in the table below from Westpac.

Westpac Bank

The gains were particularly impressive for current and future expectations for family finances and economic conditions which rose by 3.8% to as much as 7% from January.

The lift in economic expectations for the year ahead was particularly noteworthy given recent evidence suggests momentum in the economy is slowing.

However, much of the moves seen in those subindexes only reversed weakness seen in the January survey.

The lift in sentiment towards finance and the economy also did little improve expectations for household spending with the “time to buy a major household item” subindex lifting by just 0.3% following a 1.3% drop in January.

“The subindex remains below average, pointing to a continuation of the sluggish consumer spending growth seen through 2018,” Hassan said.

Along with the prospect of steady or lower interest rates, sentiment was also helped by an expectation that unemployment will continue to fall.

The Unemployment Expectations Index fell 2.9% to 120, leaving it at the lowest level in seven years. A lower reading indicates more respondents think unemployment will be lower in 12 months time.

Making the boost in broader sentiment all the more remarkable, views on the housing market, particularly for prices, deteriorated further in the latest survey.

The House Price Expectations Index dropped 8.4% to 87.8, hitting the lowest level since the question was first asked back in May 2009.

Unsurprisingly, the most pessimistic views were in New South Wales and Victoria, those states that recorded the largest decline in home prices last year. Those trends have been repeated in the early data seen so far in 2019.

Sentiment across other states remained higher, although Westpac noted “signs of softening with notable pull backs in price expectations in Queensland and Western Australia”.

The Time to Buy Index also slipped by 1.9% to 112.7, pulling back from the multi-year peak struck a month earlier.

“Confidence continues to bear up well in the face of significant headwinds. In particular, the continued house price correction, concentrated in Sydney and Melbourne, is impacting consumer expectations for house prices but so far appears to be having only limited spillover effects on wider confidence,” Hassan said.

“Sentiment among consumers in New South Wales and Victoria is holding up well, averaging in line with the readings nationally.

“Even views around family finances in these two states are on a par with or slightly better than their interstate peers.”

Hassan says the latest survey will “be of some comfort to the RBA given its concerns around spillovers from the housing downturn”.

He also says the result is consistent with the RBA leaving policy steady until at least 2021 as Westpac currently expects.

“The threshold for policy is whether spillovers knock the labour market off course. Our current forecasts do not incorporate that prospect but we acknowledge downside risks,” Hassan said.

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