Confidence leap likely brief: economists

03_Confidence leap likely brief economists

By Marty Silk
(Australian Associated Press)

The Reserve Bank’s rate cut has rallied consumer confidence but it’s likely to be only a short-lived boost, economists say.

Confidence jumped in May, rising 8.5 per cent according to the Westpac/Melbourne Institute index of consumer sentiment released on Wednesday.

The index rebounded from a four per cent fall in April, rising to 103.2 points, putting consumer sentiment 0.8 per cent higher than it was in May last year.

Westpac chief economist Bill Evans said the leap in confidence flowed from the RBA’s move to cut rates to an all-time low of 1.75 per cent last Tuesday.

“Our analysis indicates that the dominant driver of the boost to confidence has been the rate cut,” Mr Evans said in a statement.

“Sharp increases in the index in response to rate cuts are fairly common, although they depend somewhat on other events at the time and whether moves were expected.”

Commonwealth Bank senior economist Gareth Aird noted that confidence also supported by official figures showing consumer prices fell 0.2 per cent in the March quarter.

“Consumers are much more likely to react favourably to a rate cut based on low inflation rather than a downturn in the labour market or the outlook for growth,” he said in a note.

However, the survey also recorded a strong negative response about the impact of the federal budget on people’s finances, indicating more respondents believed their finances would deteriorate than those who believed they would improve.

“Since we started asking this question in 2010 all net responses have been negative and the 2016 response is the second highest over that period,” Mr Evans said.

And consumers were only 3.2 per cent more upbeat about their family finances compared to one year ago, a small increase in what has been the strongest indicator of growth in the past, JP Morgan economist Henry St John said.

“It remains to be seen whether current euphoria will quickly dissipate, or whether the prospect for further easing proves sufficient to lift confidence out of its two-year range,” Mr St John said in a note.

“If history is any precedent here, the February 2015 rate cut provided a similar sized boost to confidence, followed by an unwind in ensuing surveys.”


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