SYDNEY - Australian consumer confidence rebounded in July as income tax cuts took effect, adding to expectations the central bank will raise interest rates again this year.
A Westpac/Melbourne Institute survey shows confidence gained 3.5 per cent to 107.4 after falling in the last two months. A reading over 100 shows optimists outnumber pessimists.
The Government has introduced tax cuts worth A$36.7 billion ($44.7 billion), countering the impact of higher interest rates on household budgets in the Asia-Pacific region's fifth-largest economy.
Most economists expect the central bank, which raised borrowing costs in May to stem inflation and cool consumer spending, will increase them again this year amid higher wages and the lowest jobless rate in three decades.
"The economy retains most of the momentum built up prior to the May rate increase; labour markets remain tight and inflation is uncomfortably high," Bill Evans, Westpac's chief economist in Sydney, said.
Westpac expects the central bank will raise interest rates in the fourth quarter, "although we cannot rule out a pre-emptive move after the bank's August meeting".
Central bank Governor Ian Macfarlane, 60, who retires in September from the post, raised the overnight cash rate target a quarter point to a five-year-high 5.75 per cent in May, the first move in 14 months.
The Government's tax changes may cancel out the effect of that rate increase. The cuts will return about A$40 a month to a person on average weekly earnings of A$56,000, matching the rate increase's addition to monthly repayments on an average mortgage of A$250,000. Those earning A$150,000 a year will have their annual tax cut by 11 per cent.
Jeff Bobik, managing director of Melbourne-based private company Creative Color, which arranges shop-window displays and imports mannequins, said he had noticed a change in consumer sentiment recently.
"It has been a bit quiet in the last month or two. But things have altered a bit and are pepping up now," he said.
"The economy has been buoyant for quite a long time now and I don't see it going south."
Fifteen of 25 economists surveyed on June 30 expect another rate increase by the end of the year.
The bank left borrowing costs unchanged in June and July, and its next meeting is on August 1.
The annual inflation rate was 3 per cent in the first quarter, at the top of the central bank's target of between 2 and 3 per cent. A report on second-quarter inflation is due on July 26.
Australia's jobless rate fell to a 30-year-low 4.9 per cent in May.
Wages rose 4 per cent in the first quarter from a year earlier, just below the record 4.2 per cent in the previous three months.
The economy expanded 0.9 per cent in the three months to March 31 from the fourth quarter, with consumer spending adding 0.6 percentage points to that growth.
Westpac's confidence index is based on a phone survey of 1200 people between July 5 and 9. Householders were asked about family finances and the state of the economy. The index fell 0.1 per cent from a year ago.
The outlook for family finances for the next 12 months gained 3.9 per cent from a month earlier and the state of family finances against figures for a year earlier rose 4.6 per cent.
An index measuring whether now is a good time to buy a major household item, such as a television or appliance, jumped 5.2 per cent. Consumers' outlook on the economy for the next five years rose 0.3 per cent in July from June.
- BLOOMBERG
Consumer optimism rises across Tasman
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