Australian consumer confidence is soaring on the back of rate cut expectations

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Even before it arrives, presuming of course that it does, the prospect of a rate cut from the Reserve Bank of Australia is already helping to bolster consumer confidence.

This is no better demonstrated by the latest ANZ-Roy Morgan consumer confidence survey, released earlier today.

The index surged by 2.2% in the week ending July 31, leaving the index at 118.0, well above the series long-run average of 112.8.

According to ANZ, all bar one component rose during the week, led by a stellar rise in sentiment towards current personal finances.

“Views of their current finances jumped a solid 6.8% as Australian homeowners likely look forward to a new record low in the cash rate,” said ANZ, noting that perceptions towards future finances also rose by 1.3%.

Improvements in the economic outlook were also evident, according to the survey.

“Consumers seem to be more upbeat on the near-term economic outlook,” said ANZ. “Households’ views of the 12 month economic outlook rose for the fourth consecutive week, up a strong 3.7%”.

Slightly offsetting that improvement, sentiment towards the economic outlook in the next 5 years edged lower, falling 0.6%.

With perceptions towards personal finances and the near-term economic outlook both improving, consumers also indicated that they intend to spend more — no doubt music to the ears of policymakers should it eventuate — with the subindex measuring whether now was a good time to buy a major household item rising by a further 0.6%.

Jo Masters, senior economist at ANZ, put the stellar weekly result down to speculation that interest rates will fall when the RBA announces its August monetary policy decision later this afternoon.

“The pickup in confidence was underpinned by stronger optimism around household finances,” said Masters. “This likely reflects rising speculation of a rate cut at the RBA’s meeting this week after a weak Q2 CPI report which saw inflation hitting its lowest levels in 17 years. In addition, stronger equity markets were also likely helpful in lifting confidence.”

Masters was also impressed by the strength in the consumer finances gauges, noting that it has a good relationship to household consumption levels.

“The strength in household’s views toward their finances is particularly important as this index is a good gauge of consumer spending,” she said.

“Despite the heightened uncertainty, households’ sentiments toward their finances has held up well and continues to remain well above its long-run average.”

While no doubt a strong result, it was underpinned by expectations that a rate cut would be delivered. That outcome is anything but a certainty, suggesting that there’s a risk the improvement could be reversed should the RBA refrain from cutting rates.

Still, the result demonstrates that monetary policy still has some potency when it comes to household confidence levels. The true test, however, will be to translate higher confidence levels into greater levels of spending and investment.

The RBA rate decision will be released at 2.30pm AEST.

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