Consumer sentiment jumped by 8.5% in May to reach 103.2 according to the latest Westpac-Melbourne Institute Index of Consumer Sentiment.
This is the highest level achieved since January 2014, driven by the Federal Budget and the RBA interest rate cut.
Westpac chief economist, Bill Evans, says the interest rate cut in particular bolstered consumer confidence.
“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,” he explains. “The last four rate cuts have seen the Index rise on average 6.6%, with gains ranging from 3.5% to 8.5%.”
The rate cut, unsurprisingly, delivered a confidence boost to mortgage holders, with confidence among this group rising by 15%.
On the Federal Budget, Evans highlights the response to the question “What impact do you expect the Federal Budget to have on your family finances over the next 12 months?” reached -22.4%, which is the second highest response since 2010.
“But this result is hardly the sort of glowing response that would explain an 8.5% jump in the Sentiment Index,” he adds.
Evans says other aspects of the survey were encouraging, including the 5.8% fall in the Westpac Melbourne Institute Index of Unemployment Expectations to its second lowest level since January 2012.
“If sustained, this fall in the Index will be consistent with our expected steady improvement in labour market conditions,” he notes.
All Index components posted an improvement in May, including:
- Family finances compared to a year ago increased by 3.2%
- The one year outlook for family finances lifted by 7.2%
- The one year economic outlook jumped by 13.2%
- The 5 year economic outlook rose by 14.8%
- The ‘time to buy a major household item’ sub-index increased by 4.9%.
As for respondents’ views on the housing market, the ‘time to buy a dwelling’ lifted by 12.1%, albeit is 6.4% below its level a year ago. The outlook for house prices is more subdued with a 2.6% fall in the Westpac Melbourne Institute Index of House Price Expectations, which is 15.9% below its level of a year ago.
Evans expects interest rates to remain on hold at the RBA’s June board meeting, however, predicts a further cut at the August meeting.
“It seems likely that it will have to deliver that cut in August after it has had time to further analyse the inflation trends in the June quarter and the March quarter national accounts,” he concludes.