Cost of living fears see consumer confidence hit 18-month low amid RBA interest rate hike risks

Australian consumers are at their gloomiest point in 18 months amid fears inflation will stay higher for longer and push up interest rates.

None of Australia’s big four banks are expecting any relief from the Reserve Bank of Australia this year with inflation still well above its 2-3 per cent target.

ANZ sees rates staying on hold at 3.6 per cent for an extended period but senior economist Adelaide Timbrell said a rate hike by mid-year was now a risk.

“The risks are skewed more to a hike in the first half of the year than a cut,” she told The Nightly.

“If the Reserve Bank does judge the inflation environment to be sufficiently damaging, they do need to tighten interest rates.”

Little wonder consumers are downbeat with a new ANZ-Roy Morgan consumer confidence survey, covering the week to January 18, producing a dismal score of 79.3 points, the worst reading since July 2024.

This was also well below the 100-level where optimists outnumber pessimists, based on online surveys and phone interviews with 1009 people taken in the weeks after the post-Christmas Boxing Day sales.

“We saw a lot of discounting in the retail sector in the second half of last year; we’re now seeing some signs as of late last year that some inflation is re-emerging a little,” Ms Timbrell said.

“That could be putting people offside when it comes to their ability or willingness to purchase larger items.”

The 5.2-point drop in the second week of January was also the biggest plunge since February 2023, when the RBA had raised interest rates for the ninth straight month.

The futures market sees the Reserve Bank hiking rates at least once in 2026, that would take the cash rate to 3.85 per cent, and undo the effects of the August rate cut.

A 25 basis point rate hike would add $111 to an average, new mortgage of $694,000, as typical variable mortgage rates returned to the 6 per cent level.

The International Monetary Fund is also downbeat about Australia, singling it out as a nation that was “also projected to see some drawn-out persistence in above-target inflation” — hinting more rate cuts would be unlikely.

“Where inflation is still above target, a more cautious approach that maintains data dependence is warranted,” the IMF said in an economic update.

Australia’s annual headline inflation eased to 3.4 per cent in November, but it marked the fourth consecutive month where the consumer price index was above the RBA target band.

Despite the price pressures, Australia’s economy was only expected to post weak economic growth in 2026 and 2027, that would be well below the global average.

The 2.1 per cent projected pace for 2026 would be below the global level of 3.3 per cent, while Australia’s forecast economic growth pace of 2.2 per cent for 2027 would be well under the global average of 3.2 per cent forecast for next year.

Australia’s predicted growth pace for this year would be weaker than the United States, forecast to grow by 2.4 per cent.

But it would be stronger than Canada’s 1.6 per cent pace and the UK’s 1.3 per cent level.

Australia also has a much lower unemployment rate of 4.3 per cent, with the RBA less aggressive with rate hikes compared with other comparable rich-world nations in 2022 and 2023.

The Reserve Bank is meeting again on February 2 and 3 with the Commonwealth Bank and NAB both expecting a hike next month.