Falling interest rates spook consumers with confidence plummeting to a four-year low

author-avatar By on October 09,2019
Falling interest rates spook consumers with confidence plummeting to a four-year low

Photo by kevin laminto on Unsplash

Falling interest rates have got Australians scared and bizarrely it’s borrowers who are the most spooked, according to the most recent Westpac consumer sentiment survey.

Australian consumers are the least confident they’ve been in four years, in the wake of the most recent cut in official interest rates and growing concerns about the economy.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell 5.5% to 92.8 in October from 98.2 the month before.

A reading of 100 is the marker between optimism and pessimism – the lower the reading, the greater the pessimism.

This marks the lowest level of the Index since July 2015. Consumer confidence has fallen 8.4% since the Reserve Bank started cutting interest rates.

Westpac chief economist Bill Evans said the result would concern RBA officials.

“Typically, an interest rate cut boosts confidence particularly around consumer’s expectations for and assessments of their own finances,” Mr Evans said.

“Consumers are looking behind the reason for the rate cut and, arguably, the absolute level of rates and getting nervous.”

Pessimists have outnumbered optimists for three of the past four months.

Global issues, such as the deteriorating trade relationship between the US and China had some impact, but Mr Evans said it did not explain the sharp fall in consumer confidence.

“Issues that may also be unnerving consumers include the debate around the lack of response of fiscal policy to the deteriorating outlook; the banks’ partial pass through to the standard variable mortgage rate of the recent official cash rate cut; and the realisation among Australians that wages growth is likely to remain ‘stuck’ at a modest 2% or less for the foreseeable future.”

Sentiment fell across the board, with consumer’s expectations for the economy recording the biggest fall.

Assessments of family finances took a heavy knock, both compared to a year ago and the outlook for the next 12 months – despite the series of interest rate cuts and tax relief rolled out since July.

Despite home loan interest rates at record lows, confidence among respondents with a mortgage dropped by 4%.

The table below displays some of the sharpest variable home loan rates Savings.com.au has found on offer across the big four banks, the top 10 customer-owned institutions and the larger non-banks:

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
2.63% 2.65% $1,607 More details
2.78% 2.84% $1,639 More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 26 March 2020. View disclaimer.

Consumer attitudes towards spending deteriorated in October, with the ‘time to buy a major household item’ sub-index also at a four-year low. Spending on discretionary and big-ticket items has been especially weak over the last year – hardly good news for the struggling retail sector.

The housing-related sentiment was more mixed, with rising house prices driving down sentiment about now being a good time to buy a house. However, more bullish expectations for prices suggest affordability constraints may be starting to re-emerge.

In light of the results, Mr Evans said the signals around how consumers are assessing their finances are worthy of consideration before the Reserve Board makes its next move.

“While we expect the Bank will also be studying various types of unconventional monetary policy measures, it is to be hoped that the signals from this survey highlight the possible unintended consequences that may result from the option of resorting to negative interest rates,” Mr Evans said.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
Emma joined Savings.com.au as a Finance Journalist in 2019. She is a journalist with more than five years experience across print, broadcast and digital media, with previous stints at Style Magazines, 4ZZZ radio, and as editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of young women and millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand. When she's not writing about finance she's watching Greys Anatomy (again).

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