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RBA Cuts Reflected in Consumer Sentiment

14 November 2012

Australians are beginning to respond to interest rate cuts earlier in the year, with consumer sentiment surging to its highest point in 19 months.

And another rate cut could be on its way in December.

The Westpac Melbourne Institute Index of Consumer Sentiment for November, released on Wednesday, rose 5.2 per cent to an index level of 104.3 - its highest point since April 2011.

A reading below 100 indicates more consumers are pessimistic than optimistic about the economy.

Westpac chief economist Bill Evans said the result was unexpectedly positive, given sluggish performance of the previous readings.

"After a long 16-month period when it held below 100 for 14 of those months, we are finally starting to see that the Reserve Bank (of Australia)'s 150 basis points of interest rate cuts is having an impact," he said.

He added, though, that the index was still only 0.9 per cent above its level of this time last year.

Mr Evans said the uptick in sentiment was most likely based on global factors, as well as the RBA's rate-cutting decisions in May, June and October.

However, a desire to boost conditions in the economy could prompt the RBA to consider easing rates at its board meeting on December 4.

"The Australian economy is facing uncertainty around the mining sector and with contractionary fiscal policy and a punishingly high Australian dollar," Mr Evans said.

"We need further rate cuts to help build on these early signs that lower rates are having an impact on households' confidence."

All components of the data improved in November, with a rise of 11.1 per cent on the sub-index measuring views on family finances compared to a year ago, and a rise of 1.3 per cent on the measure of expected family finances over the next 12 months.

Australians were also positive about economic conditions over the next 12 months and five years, with the relevant sub-indices improving by six per cent and 3.4 per cent respectively.

The sub index tracking whether now was a good time to purchase a major household item rose 5.1 per cent.

However, state-by-state results suggested there was still some concern about the longevity of the mining boom, with confidence falling 5.2 per cent in Western Australia, and 8.7 per cent in South Australia, perhaps as a result of the Olympic Dam project being cancelled.

Commonwealth Bank senior economist John Peters said the survey suggested Australians were generally more positive about domestic and global conditions in November.

"It appears that the cumulative interest rate cuts over 2012 have finally propped up consumer attitudes and improved family finances," he said.

"As well, a stable unemployment rate over November and the decisive re-election of Barack Obama in the US presidential election are likely to have had some positive influences on consumers."

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