NAB now sees rate cuts instead of hike as Westpac consumer sentiment shows record bad reception to Budget

Australian consumer sentiment is at some of the worst levels seen in 50 years, with the NAB now forecasting the Reserve Bank will cut interest rates despite inflation being well above the target band.

On the four-week anniversary of the Budget, Westpac and the Melbourne Institute have revealed a monthly consumer sentiment score of just 80.6 points for June, well below the 100-point level where optimists outnumber pessimists.

Since the series began in 1974, only the start of COVID in 2020, the global financial crisis in 2008, the 1991 recession and the rapid rate hikes of 2022 and 2023 have produced worse readings.

“At 80.6, the latest monthly index read is back amongst the weakest seen in the 50-year history of the survey, pessimists outnumbering optimists by nearly 20 per cent,” Westpac’s head of macro-economic forecasting Matthew Hassan said.

“Australian consumers remain deeply pessimistic.”

A month after Treasurer Jim Chalmers delivered his fifth Budget, 70 per cent of the 1200 respondents surveyed in early June had an unfavourable view of Labor’s Budget and its plans to replace the 50 per cent capital gains tax discount on investment properties with a minimum 30 per cent tax on all asset classes.

The measure asking consumers about family finances compared with a year earlier plunged by 7.5 per cent - to an even more dismal score of 67.3 points - after the Reserve Bank raised interest rates in May for the third time in 2026.

The latest consumer sentiment reading is even more dire than the responses to the unpopular 1993 Budget where then-Labor treasurer John Dawkins failed to deliver promised “L-A-W law” income tax cuts, leading to him quitting Cabinet and Parliament within six months.

The May 12 Budget is also even more unpopular among consumers than former Liberal treasurer Joe Hockey’s 2014 effort that included a proposed $7 GP co-payment.

National Australia Bank economists Sally Auld and Gareth Spence updated their forecasts to have the Reserve Bank leaving rates on hold in June and August at 4.35 per cent.

“We no longer expect the RBA to hike by 25 basis points in August, and now see the cash rate peaking at the current rate of 4.35 per cent for the cycle,” they said.

“The next move in the cash rate is likely to be down, but the timing is uncertain.”

NAB’s call is despite April’s inflation rate of 4.5 per cent being above the RBA’s 2-3 per cent target for the ninth straight month.

This is also coinciding with April’s unemployment rate of 4.5 per cent being at a four-year high, putting it on the high side of full employment.

“The labour market is close to balance but the unemployment rate continues to gradually trend higher and we see the unemployment rate as more likely to rise than fall in coming quarters,” the NAB economists said.

Should unemployment rise much higher, the RBA would be simultaneously failing in its dual mandates of keeping inflation within the target band and maintaining full employment, which would meet the definition of stagflation.

The 30-day inter-bank futures market still sees one more rate hike by year’s end that would take it to a 15-year high of 4.6 per cent.

Westpac is even more hawkish, tipping two more hikes that would take the RBA cash rate to an 18-year high of 4.85 per cent, as its monetary policy board stayed on hold at its next meeting on Tuesday next week.

“While there is room for the board to take a quick breather, we still expect further rate hikes in subsequent meeting,” Mr Hassan said.

Financial markets are expecting the US Federal Reserve to start hiking rates again for the first time in three years after American jobs data for May showed the surprise addition of 172,000 new positions.

This caused the Australian share market to plunge by 1 per cent in early trade, with the big miners BHP and Rio Tinto falling 2.3 per cent as the US dollar rallied.

“Central banks and governments will act to stop inflation, even at the risk of putting the economy into recession because inflation spirals are so damaging,” Moomoo chief executive Michael McCarthy told The Nightly.

“The issue for the share market is that although interest rate markets in the US are now no longer reflecting the potential for rate cuts, they’re yet to reflect rate hikes and given the heat that we’re seeing in the economy, that is likely the next thing.”

A rate rise in the US and a possible rate cut in Australia, as forecast by NAB, would most likely weaken the Australian dollar, potentially worsening inflation as imports became more expensive.