Consumer confidence was just short of a 28-month high in October, as households shrugged off an official interest rate rise and concentrated on further signs of an improving economy.
But economists say rising confidence could accelerate the Reserve Bank of Australia’s (RBA) decision to raise interest rates to as high as 3.75 per cent before the end of 2009 and to 6.25 per cent by the end of 2010.
The Reserve Bank of Australia raised the cash rate by 25 basis points to 3.25 per cent last week, the first increase in 19 months.
The Westpac-Melbourne Institute index of consumer sentiment rose 1.7 per cent to 121.4 in October, from the September result of 119.3.
The index is now 47.9 per cent higher from a year ago and just shy of its June 2007 high of 121.5.
“This rise is significant since the survey follows the Reserve Bank’s decision to raise interest rates,” Westpac’s chief economist Bill Evans said in a statement on Wednesday.
“However, the result should come as no surprise.
“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 noted that the local share market had risen by 7.2 per cent, petrol prices had fallen by 7.5 per cent and the Australian currency had risen 7.5 per cent against the US dollar since the September survey.
The latest survey of 1,200 people aged 18 years and over was conducted between October 5 and 11, the same week the RBA raised the cash rate by 25 basis points to 3.25 per cent.
It was the bank’s first rate rise in 19 months.
In the same week, Australian Bureau of Statistics data showed the economy had generated 40,600 new jobs in September, while the unemployment rate fell to 5.7 per cent from 5.8 per cent a month earlier.
CommSec economist Savanth Sebastian said the last week’s rate hike was viewed as confirmation Australia had emerged from the global financial crisis and that an economic recovery was under way.
“No doubt the continuous barrage of positive economic news in recent times has allowed consumers to feel more optimistic about life,” he said.
“The concerns over job security are fast diminishing, and confirmation by the Reserve Bank that the emergency is now over is being celebrated by consumers.”
Mr Sebastian expects the cash rate to hit five per cent by the end of 2010.
“Aussie consumers are more confident, however the expected rate hikes are likely to dampen some of that enthusiasm in coming months,” he said.
Four of the five component indices in the consumer sentiment survey improved in October.
The largest improvement was the 5.7 per cent rise recorded in the index measuring expectations of economic conditions over the next 12 months.
Indices reflecting family finances versus a year ago and over the next 12 months increased by 4.2 percent and 0.5 per cent respectively, while the component measuring a good or bad time to buy major household items improved by 1.6 per cent.
Overall, the current conditions index rose by 2.7 per cent and the expectations index increased by 1.1 per cent.
“The expectations index is now at its highest level since the survey was first produced in 1975,” Westpac’s Mr Evans said.
RBC Capital Markets senior economist Su-Lin Ong said improving consumer sentiment would likely encourage the central bank to raise the cash rate to 3.50 per cent at its November 3 board meeting.
Ms Ong also expects the cash rate to reach 4.50 per cent by the end of 2010, but says there was a risk it could be higher.
“But we admit to feeling a little uncomfortable, with the risk skewed towards the bottom of a neutral 5.25 per cent to 6.25 per cent range (in 2010),” she said.
Treasurer Wayne Swan said a rise in consumer confidence in October, despite last week’s interest rate rise, showed how vital the federal government’s stimulus strategy had been for the economy.
“Today’s data shows again the vital confidence impact of stimulus which has kept customers coming through the doors of Australian businesses and kept more Australians in work,” Mr Swan said in a brief statement.
He said with consumer confidence now almost 50 per cent higher than pre-stimulus levels – along with all the impacts that has on business activity and jobs – the “data is another great example of stimulus being greater than the sum of its parts”.
“This data is another reminder of just how badly (Opposition Leader Malcolm) Turnbull and (opposition treasury spokesman Joe) Hockey misjudged the global recession when they voted against the stimulus measures that have boosted confidence and kept Australia out of recession.”