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% in November from 97.2 in October to 103.4 in November.

Westpac's Chief Economist, Bill Evans commented, “This result is around our expectations and is clearly driven by the decision by the Reserve Bank to cut the official cash rate by 0.25% with, in most cases, the major lending institutions passing the cut on in full to mortgage borrowers. The cut represented the first interest rate reduction since April 2009 and 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 by home ownership. Confidence amongst those folks which have a mortgage soared by 13.9%; people who own their house mortgage free boosted their confidence by 6%; while tenants' confidence actually fell by 6.8%.

“The Index is now indicating that optimists slightly outnumber pessimists for the first time since June 2011 and this is the highest reading for the Index since May 2011. However it is still 6.7% below its level last year. That is even after the Index had fallen by 5.3% in response 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 the Bank cut rates for the first time in the 2008/2009 rate cut cycle. When the Bank desisted from threatening higher rates, Sentiment improved by 9.1% and when the rate cut was delivered it was boosted by a further 7%. In September this year Sentiment increased by 8.1% when the Bank ceased threatening to raise rates to be followed by today's increase of 6.3% when the first rate cut was delivered. However the level of the Index in the current period is around 12% higher than in September 2008, broadly reflecting relatively less concern about global risks and job security.

“Of course, later in September 2008 Lehman Brothers collapsed intensifying the Global Financial Crisis, global anxiety spiked, job security plummeted and despite a 100bp cut by the Reserve Bank in October the Consumer Sentiment Index collapsed by 11%. While the volatile events in Europe are undoubtedly unnerving respondents we certainly do not expect a repeat of the Lehman event. Consequently, while the early stages of the 2008 cycle are a useful guide to the current cycle we do not expect the subsequent developments in 2008 to be helpful in tracking the current cycle. The real test for the current cycle is whether this recent recovery in Confidence can be sustained.

“Westpac has taken a particular interest in how respondents have assessed their own financial position. In particular, how they assess their finances over the next 12 months is of interest. In today's survey the component tracking views on "family finances over the next 12 months" actually fell from 98.1 to 97.3. In contrast the sub-indexes tracking views on "family finances compared to a year ago" rose by 7.1%; "economic conditions over the next 12 months" surged by 18.8%; "economic conditions over the next 5 years" increased by 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 by similar amounts (19.5% and 8.2% resp.). However in 2008 respondents' assessments of their 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 is currently. Ongoing concern about respondents' future finances is likely to pose headwinds for future spending patterns.

“Not surprisingly, sentiment towards housing improved by a solid 6.5%, while sentiment towards purchasing a motor vehicle was down by 3%.

“The Reserve Bank Board next meets on December 6. Our view has been that the easing cycle which has now begun is likely to be much more measured than the one we saw in 2008 when rates were slashed by 300bps over four consecutive meetings. Accordingly, we would expect the next move to be in February next year when the Bank has had time to assess the impact of the first move; more information is available about the global economy; and further evidence is available on inflation. However, our interpretation of the Bank's recent Statement on Monetary Policy is that it is troubled by developments in Europe and, due to a more downbeat assessment of the domestic economy, sees clear room to cut further. Developments overseas, as we saw in 2008, have the potential to move the next cut forward to December but, for now, our call remains that the next move will be 25 bp's in February with a further 50bps in cuts over the course of 2012”, Mr Evans said.

Issued by: Westpac Banking Corporation Further information:
Matthew Hassan Senior Economist Westpac Banking Corporation Ph: (61-2) 8254 2100 Guay Lim Melbourne Institute Ph: (61-3) 8344 2146 Michael Chua Melbourne Institute Ph: (61-3) 8344 2144

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A division of Westpac Banking Corporation ABN 33 007 457 141

Survey interviews are conducted by OZINFO Research on the telephone using trained interviewers. Telephone numbers and the household respondent are selected at random. This latest survey is based on 1200 adults aged 18 years and over, across Australia. It was conducted in the week from 31 October to 6 November 2011. The data have been weighted to reflect Australia's population distribution. Copyright at all times remains with the Melbourne Institute of Applied Economic and Social Research.

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