Consumers still downbeat, wary of more rate increases

Matthew Hassan
04:15pm October 10 2023

The Westpac-Melbourne Institute index of consumer sentiment rose 2.9 per cent to 82 in October, up from 79.7 in September.

Despite the headline improvement, the index is still tracking at deeply pessimistic levels 20 points below its long-run average.
 

Consumers are becoming more wary about the potential for further interest rises. Over 60 per cent of those surveyed after the RBA’s October rate decision expect rates to move higher over the next 12 months, compared to under 50 per cent after the September meeting. 

That’s undoubtedly being driven by inflation concerns, with August CPI nudging back above 5 per cent on an annual basis.  

On a more positive note, the outlook for family finances over the next twelve months showed a solid improvement, while there was a strong pick up in the survey sub-index which asks whether now is a good time to buy a major household item.

People are also feeling more confident about the labour market, with the unemployment expectations sub-index falling nearly 3 per cent on the month. 

Meanwhile, the survey once again showed the tension in the housing market, with price expectations becoming increasingly bullish as affordability assessments remain very weak. It looks as though we’ll continue to see a pattern of sustained price increases, but relatively low sales volumes. 

All up, it’s a fairly sombre report given that we're now moving into the pre-Christmas sales season and suggests that consumers will be watching their cash pretty carefully. 

The prospects for an improvement in sentiment in the months ahead are somewhat clouded and will largely depend on how cost-of-living pressures evolve from here. 

In terms of the RBA, the rate outlook looks finely balanced. The September quarter CPI update, which gives a better rundown on inflation than the monthly numbers, will be important ahead of the November meeting. We expect the cash rate to remain on hold, but it will be an interesting couple of board meetings ahead. 
 

Matthew Hassan

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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