Consumer confidence continues to push higher as Australians look past last week’s interest rate rise to a stronger economy and improving job prospects.
The Westpac Melbourne Institute consumer sentiment index leapt 1.7 per cent in October, to 121.4 points, the highest since June 2007. The increase is the fifth in as many months and comes one week after the Reserve Bank raised interest rates for the first time in more than a year and a half. The index was at 119.3 in September.
“The result should come as no surprise,” Westpac chief economist Bill Evans said in a statement.
“Evidence from the last tightening cycle, which began in May 2002, points to sentiment being resilient to rises while rates remain very low.”
Mr Evans said sentiment will be impacted as rates continue to climb, as they are expected to by investors and economists.
Markets are expecting a 25 basis point increase to the interest rate in November. Such a move would add an additional $40 to the average monthly payment on a $300,000 25-year home loan.
Higher confidence has also been helped by the surprise fall in the unemployment rate revealed last week, Mr Evans said. The jobless rate edged down from 5.8 per cent to 5.7 per cent in September, official data showed.
Also during the period the survey was taken, petrol prices have fallen by 7.5 per cent and the dollar rose about 7.5 per cent.
Jitters to come
Mr Evans said consumer confidence would take a hit if interest rates surpassed 3.5 per cent.
During the last interest rate rising cycle, “back in 2003 household debt to income ratios were around 130 per cent compared to the current ratio of around 155 per cent,” he said.
“Higher debt levels are likely to make households even more sensitive to increases in the standard variable rate.”
Rising home prices been a big contributor to household debt.
According to Morgan Stanley’s Gerard Minack, the ratio of average house prices to average income in Australia is now just under 5 compared with around 3.5 times at the top of the US housing cycle.
Analysts stress, however, there also are structural differences between the US and Australian housing markets.
