Consumer sentiment takes tumble

Australian consumer sentiment recorded its largest-ever fall in March after last week's interest rate rise by the central bank, a private survey showed yesterday.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 16.6 per cent to 102.4 in March from 122.8 in February.

"It is an extraordinarily strong reaction by consumers to the rate hike," said Bill Evans, Westpac's global head of economics.

"The Reserve Bank is likely to treat this result very seriously."

The Reserve Bank of Australia raised its official cash rate to 5.5 per cent from 5.25 per cent last week, its first rate hike in more than a year.

Evans said the average fall in confidence in May 2002 and November 2003 - when rates were last raised after a period of steady rates - was only 1.1 per cent, suggesting other factors compounded consumer sensitivity to the rise.

"Heavily indebted consumers have sharply revised their confidence, which prior to today's reading was near record levels," he said.

The March reading is now 10.5 per cent below a year ago and only just above the long-term average.

Evans said last week's gross domestic product (GDP) report, just two hours after the rate hike, also hurt sentiment.

The GDP data showed fourth-quarter growth at just 0.1 per cent after a rise of only 0.2 per cent in the September quarter.

The index had fallen 14.2 per cent in March 2001 after GDP figures showed the economy had contracted in the December quarter of 2000, which had prompted media talk of recession, Evans said.

However, the Reserve Bank was cutting rates then, reducing them by 1.25 per cent over February to April in 2001.

Evans said consumers were likely remain tentative for some time, given markets were predicting a further tightening in monetary policy.

"Certainly the days of consistently high measures of consumer sentiment appear to have passed."

The survey showed mortgagees' confidence dived 20.2 per cent, but tenants also lost confidence, recording a fall of 12.7 per cent.

Confidence about economic conditions over the next 12 months slumped by 25.9 per cent and fell 15.6 per cent for the five-year outlook. The index measuring whether now is a good time to buy a major household item fell by 18.2 per cent.

Consumers' assessment of family finances compared to a year ago fell by 11.1 per cent, while expectations of healthy finances over the next 12 months slid 10.5 per cent.

The index of whether now is a good time to buy a dwelling fell by 13.3 per cent.

"That is a less extreme response that the 23.4 per cent fall in sentiment towards housing that we saw in December 2003, following the consecutive rate increases. A second rate rise in 2005 would see housing confidence fall even further," Evans said.

- REUTERS