Consumers still hawkish on rates, at odds with market expectations: Westpac Red Book

Consumers continue to be hawkish about interest rates hikes, though the percentage expecting mortgage rates to rise has fallen in the last six months, reveals a recent survey.

The February results from the Westpac–Melbourne Institute Consumer Sentiment Index shows a majority (52 percent) expecting rates to rise, down from 57% in August, while 41 percent expect no change and 7 percent said rates could fall.

Though the majority figure has fallen, it is still a hawkish mix given the RBA’s mild easing bias, says the Westpac report. While official rates look to be firmly on hold, the RBA Governor’s decision statements have noted the “potential scope for easier policy, should that be appropriate”.

Even allowing for an apparent ‘upward bias’ to consumers’ rate expectations, this is a significantly more hawkish view than economist forecasts and market expectations.
"In other words, even though rates have declined more often than they have risen, consumers have rarely expected them to fall. Indeed, there is only one period – June 2012 – when the ‘net balance’ was for rates to fall," says the report.

There has been a modest rise in mortgage rates since August, with banks increasing their standard variable rates by an average of 20bps in November, citing increased capital requirements due to regulatory changes.

Prior to this, banks had already increased rates on investor loans by an average of 27bps.

The change in standard variable rates is broadly consistent with surveyed consumer expectations back in August with the median expectation at the time was for a 19bp increase. The median expectation from this month’s survey implies a further 7bp rise and a year ahead point estimate for mortgage rates of 5.72 percent.

The apparent ‘upward bias’ to consumers’ mortgage rate expectations makes it a little difficult to compare them with other benchmark measures of interest rate expectations, says the report.