Australian consumer sentiment took a hit in May following an unexpected interest rate hike by the Reserve Bank of Australia (RBA) and a “mildly disappointing” federal budget. The Westpac-Melbourne Institute index of consumer sentiment dropped by 7.9% in May compared to April, reaching a level just above the lowest reading recorded since the COVID-19 outbreak in 2020, and close to the bottom of the 20 year index range.
Source: Haver Analytics, Goldman Sachs
The surprise decision by the RBA to raise the cash rate by 0.25% in May, along with the federal budget, were identified as the key factors influencing consumer sentiment. With a reading of 79.0 in May, pessimists significantly outnumbered optimists.
The RBA’s decision to raise interest rates surprised the markets, as most traders had anticipated an extended pause. The central bank cited high inflation levels, and suggested that further increases might be necessary. However, we expect the RBA to maintain rates in June, awaiting more data on inflation and the overall economy. The current cash rate level could be the peak, considering the economic weakness and progress towards the RBA’s inflation target, but the risks remain finely balanced.
The Labor government recently announced the first budget surplus in 15 years, benefiting from strong job growth and massive mining profits. However, while the budget included billions in cost-of-living relief, some consumers may have had unrealistic expectations and desired more support. Consequently, higher living costs prompted some consumers to delay purchasing major household items.
Despite the overall decline in consumer sentiment, confidence in the housing market outlook saw a surge, with the corresponding index rising by 10.7%, reaching the highest level since February 2022. This is despite 70% of consumers expecting mortgage rates to rise over the next 12 months.
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