Consumer sentiment rose “surprisingly strong” in September, according to the latest results of the Westpac Melbourne Institute Index of Consumer Sentiment.

It shows that consumer sentiment rose by 8.1 per cent from 89.6 in August to 96.9 in September.

Westpac chief economist Bill Evans said interest rates and the state of the Australian economy are two factors affecting the way consumers react. 

“In the August survey of consumer sentiment it was reported that 73 per cent of respondents expected interest rates to rise over the next 12 months. We do not conduct the interest rate survey on a monthly basis. It is reasonable to expect that considerably fewer respondents would now expect higher rates over the year ahead. We suspect that this more relaxed outlook for interest rates has been mainly responsible for the strong bounce in confidence,” he said.

“The second contributing factor is likely to be the strong recovery in economic growth in the June quarter which was reported to have been 1.2 per cent following the contraction of 0.9% in the March quarter. That development gained particularly wide media coverage and would have boosted households' spirits.”

Despite this rise, Westpac predict that the index will remain weak overall. It is 14.8 per cent below the average reading in 2010, 14.4 per cent below its level a year ago; 7.1 per cent below the average for the first half 2011 and 4.2 per cent below the reading in June.

“We continue to expect that the next stage in the Reserve Bank's policy development will be an actual cut in interest rates. We confirm our expectation that rates will be cut by 25bp's in December. The significant move in the Bank's policy away from rate hikes to a neutral stance has helped boost confidence but we expect that over coming months that will not be sufficient to restore confidence to normal levels,” Evans said.