Australian consumers recover from rate shock

SYDNEY - Australian consumer confidence has recovered strongly this month as a fall in petrol prices cushioned the impact of higher interest rates, perhaps suggesting yet another tightening might be needed to restrain demand.

The Westpac-Melbourne Institute Consumer Sentiment Index has jumped 12.5 per cent in September to 101.2, recovering much of August's 16.2 per cent tumble.

August's hefty fall had come after the Reserve Bank of Australia raised interest rates to a five-year high of 6.0 per cent in an effort to restrain inflationary pressures.

"This 12 per cent rise is a sizable reversal, and much stronger than expected," said Bill Evans, Westpac's global head of economics.

"That indicates that the impact of a further rate increase by the Reserve Bank may be muted if petrol prices continue to fall," he added. Evans estimated that recent trends in oil prices pointed to further falls of around 7 per cent in petrol costs. Interbank bill futures edged down after the data as the market priced in a little more risk of another tightening to 6.25 per cent by Christmas.

Westpac included a special question in its September survey which found that half of all respondents were more worried about petrol prices than higher borrowing costs. Some 28 per cent were more concerned about rates and the rest neutral.

That was something of a surprise as Australians were supposed to be super-sensitive to borrowing costs given household debt had doubled in the past five years to over A$900 billion ($677 billion).

"It certainly suggests the August rate hike had less impact than first thought, though we really need to see the retail sales figures to confirm that," said Steven Milch, head of economic research at St George Bank.

The retail numbers for August are due on October 3.

"It's far from certain, but we still expect the RBA to tighten again, probably in November," he added.

Uncertainty over a future rate rise reflected recent mixed evidence on the economy.

Figures out last week showed the economy grew just 1.9 per cent in the second quarter, compared to the same quarter in 2005, the slowest pace in three years. The result was largely due to a run down in inventories, and was likely to be reversed in the second half of the year.

Likewise a survey of business out on Tuesday showed activity moderated in August and firms were more pessimistic on the outlook. But it also showed rising cost pressures and the highest level of capacity utilisation on record.

"We suspect the RBA will hike again to keep a lid on inflation," said Michael Thomas, head of economics and research at broker ICAP.

Annual consumer price inflation accelerated to a six-year high of 4.0 per cent in the second quarter and was expected to remain high this quarter.

"But neither would we be surprised to see rates cuts in the second half of next year if, as we expect, the global economy cools and commodity prices reverse course," he added.

- REUTERS