‘Renewed angst’: Australian consumer confidence slumps as interest rate cut hopes fade

Australian consumer sentiment slumped in December as households brace for higher-for-longer interest rates and hopes of further mortgage relief fade.

A new Westpac-Melbourne Institute survey on Tuesday said consumer sentiment had fallen back to “cautiously optimistic”, with its index dropping 9 per cent to 94.5 from a strong result of 103.8 in November.

An index above 100 means there are more optimists than pessimists.

The culprit appears to be hotter-than-expected inflation, which Westpac economist Ryan Wells said remains the top concern for consumers.

“Stronger results on inflation have sparked a renewed angst over the trajectory for interest rates, which is feeding more broadly into concerns over the economic outlook,” he said.

The Australian Bureau of Statistics late last month revealed consumer prices lifted 3.8 per cent nationally in the year to October, the worst inflation surge in more than a year.

Last week, the Reserve Bank kept the cash rate on hold at 3.6 per cent, with governor Michele Bullock putting hikes back on the table thanks to an “uncomfortable” bout of inflation.

National Australia Bank and Commonwealth Bank are now predicting an interest rate hike as soon as February.

Westpac on Tuesday said its mortgage rate expectations index — which tracks consumer expectations for variable mortgage rates over the next 12 months — had catapulted an extraordinary 65.4 per cent over the past three months, including a 22.2 per cent lift in December.

About 86 per cent of consumers expect mortgage rates to be the same or higher in a year’s time.

“This mirrors the move in overall sentiment, which for households with a mortgage has fallen to a 12-month low,” Mr Wells said.

AMP economist My Bui said consumers were very sensitive to rate expectations, which have been dialled up significantly throughout the month.

“Today’s consumer sentiment data underscores our view that it’s not purely a recovery in demand that has driven the recent uptick in inflation readings,” she said, pointing to the household sector, which is in better shape compared with last year thanks to rate cuts, some increases in real wages growth and a solid labour market.

“But the overall willingness to purchase remains contained,” she said.

“With the RBA expected to remain on hold for now (with a bias towards rate hikes), and the labour market likely soften a bit next year, we don’t anticipate further recovery in consumer confidence.”

The silver lining of Westpac’s report was that consumers were not expecting a major uptick in the jobless rate.