Yesterday’s -5.6 point fall in the Westpac-Melbourne Institute Consumer Sentiment Index to 104.9 was an unwelcome blow to the view that the -1.75% of cuts to official interest rates since November 2011 had finally begun to gain significant traction in the economy.
Despite the Consumer Sentiment index rising by 10.4 points in the year to April 2013, and is tracking above the long-run average level, the index is only 1.5 points above the November 2011 level when interest rates were first cut (see next chart).
The modest lift in consumer sentiment since November 2011 also compares poorly to previous rate-cutting cycles. As shown below, the previous four rate-cutting cycles (beginning in 1990, 1996, 2001, and 2008) saw an average 17.9 point lift in the consumer sentiment index at the same stage of the cycle versus the 1.5 point lift this time around (see next chart).
In fact, the lift in sentiment this time around is the second lowest of the four rate-cutting cycles, just above the 1996 episode (see next chart).
Next month’s reading will be crucial as it will indicate whether this month’s retracement was a blip on the upward trend, or something more worrying.
