The Westpac–Melbourne Institute Consumer Sentiment Index fell by seven per cent in May to 108 from 116.1 in April.
Westpac's chief economist, Bill Evans, said the survey was conducted after the release of the Federal Budget and the 25bp increase in the Reserve Bank’s overnight cash rate.
“We conducted a special question asking respondents how the Federal Budget would impact family finances over the next 12 months. Most respondents (51 per cent) indicated that the budget would have little impact; 27 per cent indicated that their finances would worsen as a result of the budget; while only 11 per cent indicated that they would improve and 10 per cent didn't know.
“This result indicates that the response to the budget was negative on balance but we expect that the most important factor causing such a large fall in the headline index was the rate hike. We have written in the past about sensitivity points for mortgage rates above which sentiment can be damaged quite substantially.
“The most recent rate increase has pushed the variable mortgage rate from 7.15 per cent to 7.4 per cent. We are clearly back in that range for the variable mortgage rate where future rate hikes are going to hurt consumers and the index can be expected to respond accordingly,” said Evans.
Confidence of respondents with a mortgage fell by 8.1 per cent in May compared with average falls of only 2.3 per cent in response to the five previous rate hikes.
“Other factors which usually influence respondents were also weak. The re-emergence of global economic nervousness would clearly also be weighing on respondents. Since the last survey the share price index has fallen by 6.8 per cent while the Australian dollar had fallen by 4.2 per cent. Petrol prices were steady,” said Evans.
“Respondents have lost their buoyancy with respect to the economic outlook. The component of the index assessing the economic outlook for the next 12 months fell by 17.3 per cent while the five year outlook fell by 10.6 per cent. Expectations for family finances over the next 12 months also fell by 3.6 per cent. The assessment of family finances today relative to a year ago rose by 2.6 per cent while ‘whether now is a good time to buy major household items’ fell by 3.4 per cent.”
Evans said it is clearly time to hold off any more rate rises, as the index shows interest rates are now starting to bite. That has been apparent for some time with retail spending and housing finance and even employment growth is slowing down.