Consumers are feeling uneasy following a surprise interest rate hike and a federal budget that left stretched households a little disappointed.
A confidence index, compiled each month by Westpac and the Melbourne Institute, has revealed a 7.9 per cent decline to 79 points in May from 85.8 in April.
Westpac chief economist Bill Evans said the index had almost fallen back to the “dismal levels” seen in March, when the index recorded its lowest monthly reading since the pandemic kicked off in 2020.
The Reserve Bank of Australia’s largely unexpected 25 basis points interest rate hike on May 2 and the federal budget on May 9 were the two key factors impacting the index.
While not necessarily damning of the budget, the index was a reflection of the limitations on the government to hand out more cost of living relief at a time of high inflation, Westpac economist Bill Evans said.
“The sub-group detail highlights both sides of this tension with big post-budget sentiment declines for those most dependent on cost-of-living relief (low-income households, the unemployed and some renters) but also a big decline in the group that has most at stake around inflation – households with a mortgage,” Mr Evans added.
Consumer surveys also tend to dip before and after budgets, he noted.
The May rate hike to 3.85 per cent also rattled consumers, with nearly 70 per cent now expecting more rises and 40 per cent tipping another one percentage point worth of hikes or more.
“Consumers are right to heed the RBA governor’s explicit warning that ‘some further tightening of monetary policy may be required’ but the extent of these fears seems excessive,” Mr Evans said.
Despite high inflation and interest rates weighing on consumer sentiment in May, the survey highlighted the resilience of the labour market and improving confidence in the housing market.
Following a few months of better dwelling values, far more survey respondents now expect house prices to lift, with optimists outnumbering pessimists by four to one.
Meanwhile, a weekly index of consumer confidence compiled by ANZ and Roy Morgan was also down in the wake of the budget, although the prospect of a surplus may have left participants feeling more upbeat about the health of the economy.
The gauge fell 1.8 points to 75.9, marking the 11th week in a row for a reading below 80 points.
While consumers remain lukewarm on the inflation and debt-constrained federal budget, the Labor government’s efforts to address fiscal issues has secured its triple-A credit rating assigned by Fitch Ratings.
The agency ticked off the federal government’s decision to bank most of the revenue gains from strong commodity prices and a robust labour market.
Early steps to improve structural budget pressures by reforming the NDIS and bringing in extra revenue were also noted, although the agency said more work was needed.
“Even so, longer-term pressure remains in the absence of additional structural reforms,” Fitch said in a statement on Tuesday.
Also on Tuesday, the central bank will release the minutes from the May board meeting on monetary policy.
– AAP
