LUCI’S CALL: Wary consumers eye interest rate outlook

The Westpac Melbourne Institute consumer sentiment survey fell 1.1 per cent in July, underlining that households remain deeply pessimistic. 

Concerns focus on the prospects for family finances, and one of the reasons we saw fresh weakness this month was that people had not yet seen the effects of award wage increases and Stage 3 tax cuts in their pay packets. 

Those might help in the months ahead but even allowing for that, pessimism continues to track close to historic low levels. 
 

It’s clear that interest rates remain a key factor, with 60 per cent of survey respondents saying they expect a further increase in the Reserve Bank cash rate.

So, how likely is that?

You should never say never, and it’s certainly possible that if inflation ends up being stronger than we expect then the RBA may feel like they have to act. But that’s not our core view.

Inflation is still too high, but it is coming down, and if it turns out roughly as we expect in the June quarter that means it’s declining at broadly the pace that the RBA is hoping for.

An outcome in line with our forecasts would support the RBA keeping the cash rate on hold in the short term, before ultimately being able to cut once inflation starts to approach its 2-3 per cent target range. 

The RBA will also be looking ahead to fresh labour market data later this month. 

Unemployment has only risen a little, but the labour market is not as tight as it was a year ago: vacancy rates have come down a lot, as have job ads. 

The RBA will also be mindful that other central banks around the world have already started cutting interest rates, or are actively thinking about it. They don’t need to move in lockstep with their overseas peers, but the experience of other central banks can be a guide to how things may play out in Australia. 

The inflation shock we saw post-pandemic was global, so the RBA will take lessons from elsewhere when it thinks about how quickly prices pressures might ease here. 

You can never be certain how the future may play out, but our current expectation is that the RBA will remain on hold, with all eyes on the data flow between now and their next meeting in August. 

For more insight from Luci, visit WestpacIQ.