Rate cut ensures bounce in consumer sentiment

Posted by Daniel Palmer on 10th September 2008

The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 7% in September from 86.2 in August to 92.2 in September in further welcome news for retailers.

The bounce was expected in the wake of recent events, according to Westpac’s Chief Economist, Bill Evans. “This type of result comes as no surprise,” he reported. “It is a direct response to the decision by the Reserve Bank to cut their overnight cash rate by 0.25% and the swift response by the banks to reduce their variable mortgage rates by a similar amount.”

The boost in consumer confidence is great news and a signal that the economy might begin turning around in coming months. “The cumulative increase in the Index over the last two months is remarkable,” Mr Evans added. “The 16.7% rise is the third largest two month increase in the last 10 years and the sixth largest two month rise since we first started measuring the Index in the mid 1970’s.”

Signs of concern are still clear, however, with the index remaining below 100. “Despite this fortuitous run of positive news, the Index is still 7.8% below the critical 100 level indicating that pessimists still significantly outnumber optimists,” Mr Evans said. “This is the eighth consecutive month where pessimists have outnumbered optimists. It is already a longer period for pessimist ascendancy than we saw in the two previous slowdowns in 1995 and 2001. However it pales in comparison with the recession years of 1989 – 1993 when we had 57 consecutive months where pessimists dominated.”

With pessimism still ruling, Mr Evans believes that a rate cut of a quarter of a percentage point will be announced by the RBA in October.