Drop in consumer confidence in April makes May rate cut likely, with more to come: Westpac - RBA rate decision countdown

A surprise drop in consumer confidence in April sends “a very clear message to the Reserve Bank that Australia needs lower interest rates,” says Westpac chief economist Bill Evans. 

The benchmark Westpac Melbourne Institute Index of Consumer Sentiment fell by 1.6% from 96.1 in March to 94.5 in April to leave it at its lowest level since August 2011. 

Borrower confidence fell by 5.1%, compared with an increase in confidence of tenants of 7.4%, while those respondents who wholly own their houses had a much smaller fall in confidence of 1.7%. 

“We confidently expect the [RBA] Board to lower rates by 0.25% [on May 1] and furthermore, we do not expect that move to be the last,” Evans says. 

“Back in July last year when the Index was even lower than today's level, partly because respondents feared that rate hikes were imminent, Westpac forecast that a rate cut cycle would commence by year's end with a total of 1% in cuts. The bank has now delivered 0.5% in cuts, and we expect the second 0.5% to be delivered in two tranches in the very near future,” he says. 

Over the month attitudes towards purchasing housing and motor vehicles deteriorated. 

The index tracking views on "time to buy a dwelling" was down by 0.3% but at a relatively solid overall level, while the index tracking views on "time to buy a vehicle" fell sharply by 4.9%, possibly reflecting recent petrol price rises. 

Over the last 12 months the standard variable mortgage rate has fallen by an average of 0.4 percentage points, yet the confidence of respondents who hold a mortgage has fallen by 14.6%. 

Evans says the previous August 2011 low came at a time when consumers were very concerned about the global outlook and warnings of an imminent rise in interest rates. 

However, he says the “surprise” April fall in consumer confidence comes “with conditions in the global economy improving and commentators interpreting the Reserve Bank governor's latest statement as hinting strongly that rates are likely to be cut next month”. 

Evans says it seems “surprising that households would have a negative reaction in April”. 

“Indeed, apart from last year’s lows and the March 2008 to May 2009 period, when households feared a recession associated with the GFC, we have to go all the way back to 2001 following the bursting of the dot com bubble and the post-Olympics/post-GST slowdown to find sustained lower reads. 

“From there we have to go all the way back to 1992 to find the next series of lower prints,” says Evans. 

Evans says while the RBA did disappoint many consumers by not cutting rates last week, the guidance from the governor's statement was “quite encouraging”. 

“However, folks with a mortgage did not see it that way.”