Consumer confidence at highest level in more than two years but March rate cut still on the cards: Westpac

Consumer sentiment lifted to its highest level in more than two years in February despite the Reserve Bank leaving the cash rate unchanged at 3% on February 5.

The latest Westpac- Melbourne Institute reading of consumer sentiment rose 7.7% in February from 100.6 in January to 108.3 in February.

This was the biggest monthly gain since September 2011.

Westpac chief economist Bill Evans says the jump in sentiment in February “follows an extended period in which sentiment has disappointed, posting at best ‘neutral’ readings despite a substantial 175 basis point reduction in interest rates since October 2011”.

“The more positive February reading suggests lower interest rates may finally be starting to gain more traction with the consumer.

“That said, confidence is still well below the levels recorded during the last easing cycle in 2008-09 which saw sustained readings of around 120,” he says.

There was a slight easing in the “time to buy a dwelling” sub-index which was 3.3% lower in February but “coming from a very high starting point”.

The February reading was 135.4 compared with a long-term average of 122.7.

Evans says the housing markets continues to show "signs of recovery although not a particularly vigorous one”.

Looking ahead to the March 5 RBA monetary policy meeting, Evans said the consumer sentiment report is “welcome news" but warns the improvement will need to be "sustained and flow through to actual spending and activity to ensure non-mining sectors of the economy are strengthening enough to counteract the downturn in mining investment that will begin in the second half of this year".

“At this stage, the picture on actual activity is still not convincing.

“Housing finance and retail sales figures point to significantly weaker momentum in these sectors late last year.

“Meanwhile the non-mining business sector also looks an unconvincing prospect to help offset the mining slowdown with higher investment

“We continue to see the case for lower rates as strong and expect the RBA to cut rates by another 25 basis points at its March meeting,” he says.