While some believe that monetary policy has reached its limits in spurring economic growth, it’s clear that it still has the power to lift confidence levels among Australian households.
Take the Reserve Bank of Australia’s (RBA) interest rate cut earlier this month, for example.
According to the latest Westpac-MI Australian consumer sentiment report, released today, confidence levels rocketed higher in May, leaving the index at the highest level seen since January 2014.
While they happened on the same day, the rate cut, rather than the federal budget five hours later, was almost entirely responsible the surge in confidence according to Westpac’s chief economist, Bill Evans.
An 8.5% lift in sentiment from just one rate cut — who said that monetary policy has lost its potency in Australia?
Behind the headline increase it was clear that one group welcomed the rate cut more than most, contributing to the enormous increase registered during the month — middle Australia.
The table below, supplied by Westpac, underlines this point. It reveals the internal movements of the May survey, breaking the results down by household income, age, location and home ownership status, among others.
Clearly, as a whole, Australia’s working class loved the RBA rate cut.
Those 25 years and older, holding a mortgage, living in urban areas with an average household income recorded the largest boost to confidence of all groups surveyed, providing a strong indication that the rate cut, and as a consequence lower mortgage rates, was seen as welcome development rather than a sign that the economy is weak.
As the engine room for Australia’s economy, particularly at a time when business investment is weakening as the mining boom fades, the boost to Australia’s middle-class is a promising sign for household spending and labour market conditions in the months ahead.
The key now is to see the improvement in sentiment translate to actual economic activity. Where the rubber hits the road, as the saying goes.
The RBA looks set to deliver, at least according to financial markets, with another rate cut now all but expected to arrive in the months ahead, most likely in August.
That leaves politics and international developments as the two main factors that could undo the RBA’s work.
There’s not much that can be done about the latter, leaving the federal election campaign as the one main risk that could potentially thwart the improvement in sentiment levels.
It’s a manageable risk, but that requires both major parties to tow the line.
When they’re busy battling away, pointing out the others perceived evils of the other in at attempt to sway the electorate, let’s hope that they remember the electorate, of which the vast majority is middle Australia, will be watching.
Negativity throughout the election campaign will do little to boost sentiment, nor the economy. Instead it will almost certainly do the opposite, ensuring the task facing the incoming government will be made all the more harder.
Something for both sides to consider over the next 51 days.