Consumer sentiment swings towards greater rate cut anticipation: Westpac

Consumers are growing more confident that mortgage rates will continue to fall over the next 12 months following the May and June RBA rate cuts, but a significant proportion still expect rates to rise, according to the June Westpac-Melbourne Institute consumer survey.

The June results show for the first time since Westpac began asking the question (in February 2010) a majority of consumers (52%) expect mortgage rates to fall over the next 12 months.

This compares with the less than 40% who expected rates to fall when the question was last asked in February this year and fewer than 20% of consumers who thought so in August 2011 – before the RBA began its current rate cutting cycle.

Of those who expect rates to fall over the course of the next year the vast majority (83%) expect mortgage rates to fall by less than one percentage point, while the remaining 17% expect a fall in excess of one percentage point.

A quarter of consumers surveyed still expect mortgage rates to rise over the next year, while slightly less (23%) expect no change in mortgage rates.

Westpac senior economist Matthew Hassan says the results indicate that consumers have a “firmer sense of where rates are likely to head” but cautions that the “consensus is not particularly strong”.

“At 52%, the proportion expecting rates to fall is well short of the 70 to 90% that were calling rates to rise in surveys conducted in 2010-11.”

Hassan also points out that the responses from consumers to the question of where mortgage rates are heading fluctuated over the week they were asked indicating a “lack of conviction”.

“Responses over the course of the survey week (June 4 to June 10) – which was a very busy one for interest rate developments, economic surprises and the unfolding crisis in Europe – show significant daily fluctuations and a less certain view amongst those surveyed later in the week.

“The high and rising proportion saying they simply don’t know also suggests a more uncertain outlook for rates,” he says.

Hassan says the bottom line is that “predicting mortgage interest rates has become very hard” due to mixed signals in the “official guidance”. 

As an example he says the RBA has cut rates (usually a sign the economy is worsening) but affirmed “Australia’s positive prospects”. 

“Add to this the surprisingly upbeat first quarter economic data on the domestic front, the deeply threatening and uncertain situation in Europe, and the less predictable linkage between official cash rate changes and mortgage interest rates and it’s not surprising consumers are unsure about future moves,” he says. 

Hassan also points out that interest rate market pricing and economist surveys are equally unhelpful. 

“The former is being skewed by investors seeking ways to profit from downside risks to the global growth scenario – and implies 100bps of easing by year end. 

“Economist forecasts range from up 25bps to another 100bps in cuts to the cash rate with a median view of a 25 bps reduction (Westpac’s forecast is for 75 bps,” he says. 

“And in both cases the forecasts are for the official cash rate rather than the average standard variable mortgage rate,” he says. 

State-by-state responses to the question indicate that consumers from South Australia (59%) and NSW (56%) are the most optimistic about rates falling while those in Queensland (49%) are the least optimistic.

Men are more optimistic than women about rates falling, as are those that own their home outright or have a mortgage compared with renters.