The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 2.5 per cent in November to 118.3 from 121.4 in October.
Westpac’s chief economist Bill Evans said it was a modest response after two recent rate rises.
“Given that this fall comes after a second consecutive increase in the Reserve Bank’s overnight cash rate and associated increases in variable mortgage rates it has to be classified as a modest response. The level of the index is still 38.3 per cent above its level from a year ago,” he said.
“Over the two month period since the RBA began raising rates the index has fallen by 0.8 per cent. This is broadly comparable to the 0.7 per cent fall we saw in response to the beginning of the last rate hike cycle when the bank raised rates by 0.25 per cent in both May and June 2002.”
The recent increases in the standard variable mortgage rate have seen it increase from 5.8 per cent to 6.3 per cent.
“With household debt levels now higher than in 2003, the 2.5 per cent fall in the index is probably signalling that sentiment will become progressively more sensitive to the sequence of future rate hikes that we expect through to mid-next year,” added Evans.
“Whereas last month other factors such as the share market and petrol prices were supporting sentiment, we saw the reverse for this survey. Petrol prices rose by 2.3 per cent, while the share index was down by 3.3 per cent. The Australian dollar increased by 1.2 per cent.
All components of the index fell in November, with those measuring expectations registering the largest falls: family finances over the next 12 months (–4 per cent); economic conditions over the next 12 months (–2.5 per cent) and economic conditions over the next five years (– 3.7 per cent). Those measuring current conditions were more resilient: good time to buy major household items (–1.2 per cent) and family finances compared to a year ago (–0.7 per cent).
“Given that the Expectations Index was at its highest level on record in October, a sharper fall (–3.4 per cent) than in the Current Conditions Index (–1 per cent) was not surprising,” explained Evans.
"Retailers should still be encouraged given that opinions on ‘whether now is a good time to buy a major household item’ are still up 58 per cent on a year ago.
“… Our survey will indicate to the bank that we have probably now reached the point in the rate hike cycle when households will become increasingly sensitive to higher rates. However, confidence is still at remarkably high levels and the bank is likely to take the opportunity to gradually remove more of the stimulus. Today’s results do, however, signal that the extent of rate hikes in 2010 envisaged by current market pricing is unlikely to transpire,” said Evans.