(Bloomberg) — Australia’s consumer confidence tumbled into “deep pessimism” on mounting cost of living pressures and expectations of further interest rate increases, underscoring the Reserve Bank’s dilemma on how far to push its tightening cycle.
(Bloomberg) — Australia’s consumer confidence tumbled into “deep pessimism” on mounting cost of living pressures and expectations of further interest rate increases, underscoring the Reserve Bank’s dilemma on how far to push its tightening cycle.
Consumer sentiment slid 6.9% to 78.5 in February, a Westpac Banking Corp. survey showed Tuesday. Among respondents after last week’s policy decision, 80% expect rates to move higher over the next year, with more than half expecting a hike of 1 percentage point or more.
The sharp reaction reflects the high sensitivity of Australian borrowers to rising rates and the fine judgment Governor Philip Lowe needs to make in terms of cooling inflation without tipping the economy into recession.
His nine consecutive rate hikes — and comment Feb. 7 that there were more to come — has turned the heat up on the Labor government as it decides whether to extend Lowe’s term or draft in a replacement.
“The survey continues to give a very clear warning that the pressures bearing down on the consumer are becoming intense,” Westpac Senior Economist Matthew Hassan said. “We expect an abrupt slowdown” in consumer spending “in coming months.”
Survey respondents with mortgages were particularly downbeat on their finances versus a year earlier, with the index reading slumping 14.4% to 55.4 points. “These are amongst the bleakest responses on this question in the history of the survey, which goes back to the mid-1970s,” Hassan said.
The RBA has hiked by 3.25 percentage points since May and the current 3.35% cash rate is the highest since late 2012. Lowe, who in December signaled the possibility of a pause, last week made clear that was off the table and there was further tightening to come.
His turnaround followed a red-hot inflation report in the fourth quarter, with the price increases adding to households’ woes. Economists predict a peak rate of 3.85% by May and money markets reckon the cash rate will reach 4.1% in July-August.
Lowe has been under intensifying pressure as his seven-year term is due to conclude in September. A government-ordered independent review of the RBA is due to release its findings on March 31 and Treasurer Jim Chalmers says the Labor government will respond to it before the budget in early May.
The RBA’s sharp pivot to even higher borrowing costs is the latest in a series of missteps that have made Lowe’s reappointment look increasingly unlikely. Chalmers says the government will make an announcement on the governor around mid-year.
For the eight-month-old Labor government, the RBA’s aggressive tightening is difficult to explain to an electorate that hasn’t faced an inflation breakout in at least a decade. Many voters still think the government sets monetary policy, complicating the political narrative.
As to the outlook, Westpac had little positive to offer in its report. Consumers expect 2023 “to be a very challenging year for the economy.”
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