Aussies rule out RBA rate hike as confidence levels jump

Aussies’ worries the economy will continue to struggle in the near future are failing to calm the winds, with the rise in consumer confidence recorded in March.

The latest Westpac-Melbourne Institute Consumer Sentiment Index shows people are feeling optimistic despite the interest rate hike in February, rising 1.2% to 91.6 in March.

Despite rising inflation in recent months, markets expect the Reserve Bank to ease tightening when the board meets next week.

Australian head of macro-forecasting Matthew Hassan said consumers “see little improvement in current conditions” this month, with much of that view centered on the outlook for interest rates.

The index factors in how borrowers feel about the short- and medium-term economic situation, the timing of spending decisions, and how their household finances are compared to the previous 12 months.

Although people are feeling very positive compared to the beginning of the year, expectations for a strong rate environment are high.

“There is still a strong consensus that interest rates will rise from here,” Mr Hassan said.

The Westpac-Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, fell 3.9% in March.

This restores about a quarter of the increase seen in February, although expectations for a higher refund are locked in.

“More than 75% of consumers expect mortgage rates to increase in the next 12 months,” said Mr Hassan.

Consumers are also showing little confidence in the outlook for the labor market, reflecting RBA governor Michele Bullock’s recent comments about the bank’s difficulties with reliable forecasting.

The 3.8% increase in the list shows that many people expect unemployment to increase in the coming year, a risk that could pressure the Bank to raise rates to balance its dual role of managing both.

Ahead of the RBA’s much-anticipated decision next week, Mr Hassan noted that the war in the Middle East could keep the bank’s hand steady.

“Although we continue to expect that the most likely time for the next price increase is May, there may be a price increase that will be discussed at the March meeting,” he said.

“Domestic developments are mixed: growth comes in above the RBA’s expectations for 2025 but with better news about supply capacity and the latest sentiment survey suggesting momentum is cooling across the consumer sector.

“However, the global situation is not yet stable. The conflict in the Middle East has affected energy consumption and is causing serious doubts about growth.”

The index shows growing conflict in the Middle East is affecting Australians, with 90% of consumers seeing news from abroad as ‘negative’. This compares to 74% three months ago.

RBA Governor Michele Bullock says it is too early to know how the Iran conflict will affect Australian currencies. Photo: Martin Ollman

---

Westpac noted that March’s reading was “very similar” to what was seen during Russia’s 2022 invasion of Ukraine.

“The RBA will be aware of how rising fuel prices feed into local inflation but will also be wary of making policy changes amid a rapidly changing and uncertain environment,” Mr Hassan said.

“On balance we believe it will choose to leave rates unchanged in March and the next increase will come later, when the dust settles a bit.”

This article originally appeared on Mortgage Choice and has been republished with permission.