Interest rates secondary in consumer concerns

Interest rates hikes or drops remain a second-order economic concern for consumers still obsessed with the cost of everyday goods and services Photo: Louie Douvis

Common question I get asked: how much do interest rates affect consumer confidence?

Unexpected answer I give: not much.

True, an interest-rate cut might prevent sentiment from slumping further. The Westpac-Melbourne Institute Index in October registered only a slight rise in consumer confidence, despite a rate cut that month.

Westpac chief economist Bill Evans was disappointed. “There were a number of reasons to have expected the sentiment index to have increased by more than only 1 per cent”, he said. In his view, the rate cut was unexpected and should have been a pleasant surprise for Australian consumers.

Australian consumers are too set in their ways at present to be swayed much by pleasant surprises. In our recent Mind & Mood report, respondents in our groups mentioned in passing the relatively low interest rates as a plus. “Interest rates have gone down from this time last year so I am saving 400 to 500 bucks a month on home loans.” “Interest rates are lower. That helps.”

But they moved on quickly from lower interest rates to a laundry list of economic worries that overwhelmed that flicker of good feeling: utilities, food, travel, school and childcare fees, council rates, etc, all the perceived increases magnified in their mind by the feeling they are working harder for the same pay packet.

As one participant in our research put it, when asked how he felt about his economic situation now compared with a year ago: “Every single bill has gone up. And we got hardly anything from the government. Nothing has dropped except interest rates.”

Of course, a cut in the official interest rate also means little to consumers who don’t expect that cut to be passed on in full or at all by the major banks.

The only time in my career as a social researcher that I’ve seen the interest rate question decisively impact consumer sentiment was during the immediate aftermath of the global financial crisis. Lowered interest rates were a sign the Reserve Bank was acting decisively to further protect the Australian economy; consumers perceived low interest rates were keeping some cash in their pocket and creating a better environment for prospective home owners.

I have queried economists on why interest rates don’t feature more as a discussion in our research. One such economist asked me if I knew what the rate on my mortgage was and how much I would save monthly if the rate was cut by 0.25 per cent. No idea. But did I know the current price of a litre of petrol or a kilo of bananas? You bet.

And so interest rates hikes or drops remain a second-order economic concern for consumers still obsessed with the cost of everyday goods and services, something I am sure the banks are secretly happy about.

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