This is an extraordinarily large fall. Even though the 9.1% fall is around the 3 year average (9.4%) fall in the Index following a rate hike by the Reserve Bank, this fall has come from a lower base and pushes the Index to its lowest level since September 1993.
The decline over the last three months (23.9 points or 21.2%) is the sharpest three month decline since the Index was first measured in January 1975. There were many other periods during that time when the Reserve Bank did consecutive rate hikes so this result cannot just be attributed to the shock effect of consecutive moves.
The current credit crisis, which is pushing mortgage and other retail lending rates even higher than the rises associated with the Reserve Bank, has also precipitated the biggest (23.3%) fall in the share market since the recession in 1990-91.
In any rate hike cycle there will be one move (usually the last) when the effect is substantially greater than the effect of any previous move. We saw that in both December 1994 and August 2000 when the previous tightening cycles came to an end. This result points to a similar effect for the March move and probably signals that the Reserve Bank has tightened for the last time in this long cycle which began in May 2002.
Predictably, the confidence of the respondents who hold a mortgage fell by a spectacular 12.1%, to be 31.5% down over the year compared to the overall index which is down by 23.3%.
Gloom over the increases in interest rates has probably been compounded by additional mortgage rate increases by lenders and speculation that there is more to come. Confidence on issues such as employment; inflation; international conditions and overall economic conditions has collapsed relative to a year ago.
All components of the Index were down sharply. The assessment of family finances compared to a year ago fell by 15.6%, while opinions on whether now is a good time to buy a major household item fell by 10.9%. Expectations for family finances over the next 12 months fell by 8%. The outlook for economic conditions over the next 12 months was down by 5.6% and the 5 year outlook also fell by 5.6%.
Households have dramatically changed their attitudes about where to save. The proportion of respondents choosing shares fell by 6.7 percentage points to 7.9% from 14.6% in December. This reading is well below levels seen in the aftermath of the dot-com bubble burst in 2001, and clearly the lowest on record for this series which commenced in 1995. Real estate was also unpopular. The proportion choosing real estate as the wisest place for savings fell by 3.7 percentage points from 21.1% to 17.5%. Households now clearly favour banks (up 2.4 percentage points to 24.7%) and paying down debt (up 8.4 percentage points from 12.9% to 21.3%).
Spending plans have also become much more conservative. The Index on whether now is a good time to buy a dwelling fell by 11.4% since December, to 71.8 the lowest since the housing boom faltered in late 2003 and the second lowest since the question was first included in 1995. Intentions towards motor vehicles have soured. The Index of whether it is a good time to buy a car fell by 22.5% since December to the lowest level since the question was first included in 1995, and 28.3% below the average level over the last 10 years.
The results from this Survey are very important. They indicate that the Reserve Bank's last rate hike, combined with further independent moves from the mortgage lenders may have finally slowed demand such that inflationary pressures will ease. As discussed, the last rate hike in a cycle will generally have a much bigger effect than the moves that preceded it. The rate hike in March 2008 appears to fit that profile. The Governor of the Reserve Bank opined in his last Statement that the March move may have been enough to sufficiently slow demand in the economy. The evidence from the Consumer Sentiment Index is that he is probably correct.
Recent further adverse developments in credit markets indicate that retail interest rates including mortgage rates could well rise further without any further action from the Reserve Bank. This development takes even more pressure off the Bank to raise its rates.
As such, we do not expect that the Bank will raise rates again in the cycle. However, inflation will remain uncomfortably high and generous tax cuts later this year are likely to significantly boost households. Interest rates are now likely to stay around these relatively high levels until the Bank feels confident that inflation pressures have eased significantly.
That is not expected to occur before the second half of 2009 at the earliest.
Westpac Institutional Bank
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