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Published by: David4564654 on Nov 09, 2011
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A division of Westpac Banking Corporation ABN 33 007 457 141
Media release
9 November 2011
Strict Embargo 10:30am
First rate cut boosts Consumer Sentiment
The Westpac Melbourne Institute Index of Consumer Sentiment increased by 6.3% inNovember from 97.2 in October to 103.4 in November.Westpac's Chief Economist, Bill Evans commented, “This result is around our expectationsand is clearly driven by the decision by the Reserve Bank to cut the official cash rate by0.25% with, in most cases, the major lending institutions passing the cut on in full tomortgage borrowers. The cut represented the first interest rate reduction since April 2009and comes only a few months after the Bank desisted from threatening higher rates.“The significance of the rates decision is apparent from the breakdown in responses byhome ownership. Confidence amongst those folks which have a mortgage soared by13.9%; people who own their house mortgage free boosted their confidence by 6%; whiletenants' confidence actually fell by 6.8%.“The Index is now indicating that optimists slightly outnumber pessimists for the first timesince June 2011 and this is the highest reading for the Index since May 2011. However itis still 6.7% below its level last year. That is even after the Index had fallen by 5.3% inresponse to the rate hike in November last year.
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A division of Westpac Banking Corporation ABN 33 007 457 141
“The pattern of the Index's moves follows closely the pattern we saw in 2008 when theBank cut rates for the first time in the 2008/2009 rate cut cycle. When the Bank desistedfrom threatening higher rates, Sentiment improved by 9.1% and when the rate cut wasdelivered it was boosted by a further 7%. In September this year Sentiment increased by8.1% when the Bank ceased threatening to raise rates to be followed by today's increaseof 6.3% when the first rate cut was delivered. However the level of the Index in the currentperiod is around 12% higher than in September 2008, broadly reflecting relatively lessconcern about global risks and job security.“Of course, later in September 2008 Lehman Brothers collapsed intensifying the GlobalFinancial Crisis, global anxiety spiked, job security plummeted and despite a 100bp cut bythe Reserve Bank in October the Consumer Sentiment Index collapsed by 11%. While thevolatile events in Europe are undoubtedly unnerving respondents we certainly do notexpect a repeat of the Lehman event. Consequently, while the early stages of the 2008cycle are a useful guide to the current cycle we do not expect the subsequentdevelopments in 2008 to be helpful in tracking the current cycle. The real test for thecurrent cycle is whether this recent recovery in Confidence can be sustained.
“Westpac has taken a particular interest in how respondents have assessed their ownfinancial position. In particular, how they assess their finances over the next 12 months isof interest. In today's survey the component tracking views on "family finances over thenext 12 months" actually fell from 98.1 to 97.3. In contrast the sub-indexes tracking viewson "family finances compared to a year ago" rose by 7.1%; "economic conditions over thenext 12 months" surged by 18.8%; "economic conditions over the next 5 years" increasedby 7.4%; and "whether now is a good time to buy a major household item" rose by 1.8%.We note that in 2008, following the first rate cut, the "economic" components increased bysimilar amounts (19.5% and 8.2% resp.). However in 2008 respondents' assessments oftheir own financial position over the next 12 months increased by 9.2% compared to a fall
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A division of Westpac Banking Corporation ABN 33 007 457 141
in the current cycle. The level of that component was 15% higher in 2008 than it iscurrently. Ongoing concern about respondents' future finances is likely to pose headwindsfor future spending patterns.“Not surprisingly, sentiment towards housing improved by a solid 6.5%, while sentimenttowards purchasing a motor vehicle was down by 3%.“The Reserve Bank Board next meets on December 6. Our view has been that the easingcycle which has now begun is likely to be much more measured than the one we saw in2008 when rates were slashed by 300bps over four consecutive meetings. Accordingly, wewould expect the next move to be in February next year when the Bank has had time toassess the impact of the first move; more information is available about the globaleconomy; and further evidence is available on inflation. However, our interpretation of theBank's recent Statement on Monetary Policy is that it is troubled by developments inEurope and, due to a more downbeat assessment of the domestic economy, sees clearroom to cut further. Developments overseas, as we saw in 2008, have the potential tomove the next cut forward to December but, for now, our call remains that the next movewill be 25 bp's in February with a further 50bps in cuts over the course of 2012”, Mr Evanssaid.
Issued by: Westpac Banking Corporation
Further information:
Matthew Hassan Guay Lim Michael ChuaSenior Economist Melbourne Institute Melbourne InstituteWestpac Banking Corporation Ph: (61-3) 8344 2146 Ph: (61-3) 8344 2144Ph: (61-2) 8254 2100

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