Charlie Nelson
24 June 2002
Australian consumers are surprisingly buoyant despite recent rises in
official interest rates. The latest Westpac-Melbourne Institute survey of
consumer sentiment, carried out only a week after the Reserve Bank raised rates
for the second time, posted a rise of 2.5 per cent in June.
Katharine Murphy, Australian Financial Review, 20 June 2002
Based on this result, Westpac's general manager economics, Bill Evans said "Expect a 0.25 per cent rate increase in early July, which would still have rates below the bank's neutral target."
There are three major flaws in this commentary and it is to be hoped that the Reserve Bank Board would be wise enough to ignore consumer sentiment data.
Research overseas has reached similar conclusions about consumer confidence/sentiment indexes.
About 20% of consumers prefer rates to increase, compared with less than 40% who want rates to go down. Those who prefer higher rates are net recipients of interest and are typically over 55 years old and include self-funded retirees and age pensioners with some savings. It would be expected that their confidence would rise with higher interest rates (see our research paper).
The Australian Financial Review article had a clue to this in the chart showing the index sentiment by income. Sentiment has been static for all income groups except those earning less than $20,000 - sentiment has increased 15% in this income group since January 2002. Many self-funded retirees and pensioners with savings have incomes less than $20,000.
Consumers with a mortgage typically take 15 months before starting to adjust their spending after a rate rise. This is because many are making more than the minimum repayment and are not required to increase their repayment. Others can save less or borrow more to maintain lifestyle. It is unreasonable to expect that they will feel worse off, or expect to, for many months after interest rates start to rise.