Interpac Business and Migration Solutions Melbourne Australia

December 9, 2009

Consumer confidence slid for the second consecutive month in December as borrowers worried about the effect of higher interest rate on their budgets, a survey shows.

The Westpac-Melbourne Institute index of consumer sentiment fell 3.8 per cent to 113.8 points in December, from 118.3 in November.

However, the number of optimists still outweighed the pessimists.

Westpac chief economist Bill Evans said the fall in the index was "surprisingly modest" following the recent interest rate rises.

The Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 3.75 per cent on December 1, following similar moves in October and November.

"We expected that there was a real possibility that the index would fall much more sharply than the 3.8 per cent which it has registered," Mr Evans said in a statement on Wednesday.

"Note that after the RBA tightened by 25 basis points in March 2005 the variable mortgage rate was increased to 7.3 per cent from 7.05 per cent and the index fell by a massive 15.5 per cent.

"Each subsequent increase in mortgage rates over the course of 2006 and 2007 generally saw "double-digit" falls in the index."

National Australia Bank senior economist Spiros Papadopoulos said the recent fall in confidence was to be expected following the RBA interest rate hikes.

"But despite the small declines in the past two months, confidence remains 24 per cent higher than a year ago," Mr Papadopoulos said.

"Better than expected labour market outcomes and the solid growth in house prices means that confidence remains well above long-run levels."

Mr Evans said the consumers with a home loan responded more negatively in the survey to the rate rises than those with no mortgage.

"Confidence amongst those with a mortgage fell by 8.9 per cent, while confidence of those who are renting actually increased by 1.6 per cent, while those wholly owning their homes registered a fall of 4.1 per cent," he said.

Other positive factors were clearly supporting the confidence of those households who were not borrowers, Mr Evans said.

"The share market rose by 2.4 per cent, the Australian dollar was slightly higher and petrol prices were broadly stable (up by 0.7 per cent)," he said.

"However, encouraging news on the labour market was probably the most important offset to the news on interest rates.

The Australian economy added 40,000 new jobs in September followed by a further 25,000 jobs in October, official data had earlier showed.

Mr Evans said it was likely the central bank would raise the cash rate by 25 basis points to 4.0 per cent when its board meets next on February 2. The RBA board does not meet in January.

"The evidence from this survey is that households overall are coping relatively well with the interest rate increases to date," he said.

"Optimism about house prices and jobs are partially offsetting the impact of rate hikes on consumer sentiment.

"We have little doubt that we are nearing a point where the level of the variable mortgage rate will start to elicit a much more negative response across all households but the evidence from this survey is that we are not there yet."

(Source from Theage.com.au)