Rate rise puts hurt on Aussie consumer

CANBERRA - Consumer sentiment has dropped sharply in response to the latest rise in interest rates and, to a lesser degree, last week's Federal Budget.

The Westpac-Melbourne Institute consumer sentiment index fell 7 per cent in May.

"We expect that the most important factor causing such a large fall in the headline index was the rate hike," Westpac chief economist Bill Evans said releasing the data yesterday.

The Reserve Bank raised the cash rate by a further 25 basis points to 4.5 per cent earlier in May, the third consecutive monthly increase and sixth since October last year.

The latest increase took the average standard variable mortgage rate to 7.3 per cent, an area that has historically caused a downturn in sentiment.

"We are clearly back in that range for the variable mortgage rate where future rate hikes are going to hurt consumers and the index can be expected to respond accordingly," Evans said.

On the Budget, respondents were asked how it would impact on their family finances.

Fifty-one per cent indicated that the Budget would have little impact, 27 per cent said it would worsen their finances and only 11 per cent said they would improve. Ten per cent didn't know.

Highlighting the impact of rising interest rates, the Time to Buy a Dwelling index fell 15.4 per cent to be 35.6 per cent below its long run average.

It has fallen 40 per cent since its peak in August 2009.

The re-emergence of global economic jitters also weighed on respondents with the share price index dropping 6.8 per cent and the Australian dollar down 4.2 per cent since the last survey.

Evans said the index showed that interest rates were starting to bite - apparent in retail sales and housing finance data - and employment growth was slowing.

"The news offshore is disturbing with the disruption to global financial markets likely to impact on the global economic recovery," Evans said.

However, inflation was likely to continue to dominate the Reserve Bank's priorities.

As a result, Evans expects the next increase in rates to be in August following the release of the June quarter consumer price index.

- AAP