Bloomberg News

Consumer Confidence Stalls After RBA Rate Cut

May 15, 2012

Women carry shopping bags at the Pitt Street shopping mall in Sydney, Australia. Photographer: Brendon Thorne/Bloomberg

Women carry shopping bags at the Pitt Street shopping mall in Sydney, Australia. Photographer: Brendon Thorne/Bloomberg

Australian consumer confidence stagnated near the lowest level this year as concern about the global economy countered the central bank’s deepest interest- rate cut in three years, a private survey showed.

The sentiment index for May rose 0.8 percent to 95.3, a Westpac Banking Corp. (WBC) and Melbourne Institute survey taken May 7-11 of 1,200 consumers showed today in Sydney. From a year earlier, confidence was down 8.3 percent.

“This is a disappointing result,” Bill Evans, Westpac’s chief economist, said in a statement, noting the polling followed the rate reduction and a May 10 report showing the unemployment rate fell below 5 percent for the first time in a year. “Increasingly disturbing news around Europe and specifically Greece is likely to have unnerved households.”

The report reflects mortgage rates falling by an average 37 basis points after the Reserve Bank of Australia this month slashed the overnight cash rate target by half a percentage point to a two-year low of 3.75 percent, Westpac said. Almost 90 percent of Australian mortgages have variable rates.

In minutes of its May 1 meeting released yesterday, the RBA explained that it lowered the benchmark by 50 basis points instead of the more widely forecast 25 points to ensure consumers borrowed at an “appropriate” level.

Fiscal Tightening

While monetary policy is loosened, fiscal policy is tightening. Prime Minister Julia Gillard’s government unveiled a budget on May 8 that aims to return to surplus next year and scrapped a planned cut in company taxes to fund payouts for low- and middle-income earners.

The plan’s “results were disappointing, with only 9.9 percent of respondents indicating that the budget would ‘improve’ family finances, while 36 percent indicated the budget would ‘worsen’ family finances,” Evans said.

The budget includes a payment to families of as much as A$820 ($815) for each child in high school, while households with two children will receive an extra A$600 a year starting July 2013 using revenue from the mining tax. The government has also introduced an insurance plan for the disabled and boosted its national dentistry health-care coffers by A$513 million to reduce waiting lists at dentists.

Rate-Cut Room

Gillard said in an interview after the budget that a return to surplus gives the central bank “maximum room” to adjust rates if needed and ease pressure on manufacturers that have been hobbled by currency gains. Traders are pricing in an 89 percent chance of a quarter-point cut at the RBA’s June 5 meeting, swaps data compiled by Bloomberg show.

“We expect household will continue to be cautious and backs our call that RBA will follow up with a 25 basis-point cut in June,” said Celeste Tay, a Singapore-based economist at 4cast Ltd.

Even after the RBA’s latest rate reduction, Australia has the highest benchmark borrowing cost among major developed economies. Policy rates are near zero in the U.S. and Japan, 1 percent in the euro area and Canada, and a record-low 2.5 percent in neighboring New Zealand.

In his statement, Evans said “there is ample scope for further rate cuts.” He said that while the RBA may wait until July before easing again, “developments overseas along with today’s evidence that the recent cut has had little impact on confidence could easily see the bank bring the decision forward to the next board meeting.”

Currency’s Fall

The local currency, which soared to a post-1983 floating record of $1.1081 in July, has declined about 10 percent since then and this week fell below parity with the U.S. dollar for the first time this year. Earlier today the so-called Aussie traded as low as 99.30 U.S. cents and it was at 99.36 cents at 11:03 a.m. in Sydney.

Australia’s unemployment rate fell to 4.9 percent from 5.2 percent in March, the lowest level since April 2011, a government report showed last week.

The economy is being powered by demand for energy and minerals located in the nation’s north and west from emerging countries including India and China, driving a more than 30 percent rise in the local currency in the past three years. That’s put pressure on non-resource industries such as manufacturing and tourism in the most-populous states of New South Wales and Victoria.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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