Australia Consumers Cheered By Stocks, Low Rates

Australian consumer sentiment surged in April, boosted by rebounding stock markets, low interest rates and cash payments by the government fighting to stave off the threat of a looming recession.


In another sign of the effectiveness of substantial rate cuts and generous government incentives, first-home buyers flocked to the property sector in February, driving home loans up for a fifth straight month.

Wednesday's upbeat data should reinforce the Reserve Bank of Australia's confidence that rate cuts are helping the economy and market expectations that any future reductions in interest rates would be small and slow.

The central bank trimmed rates by a further 25 basis points to a record low of 3.0 percent on Tuesday, taking total rate cuts since September to 425 basis points.

A survey of 1,200 people by the Westpac-Melbourne Institute showed its index of consumer sentiment jumped 8.3 percent in April. It was the first rise in three months and left the index 6.0 percent higher from April last year, a huge improvement from March when it was still down 3.4 percent on a year ago.

"This is a surprisingly strong result," said Westpac chief economist Bill Evans. "Concerns about the global economy have eased as share markets boomed," he said, noting the local market had climbed 20 percent from its low for
the year.

"A further positive response to the fiscal stimulus package is likely to be buoying consumers," said Evans. Around A$7 billion ($5 billion) of handouts go to taxpayers from this month, following an even bigger package in December.

Markets are pricing in more cuts toward 2.5 percent in the near term, and some are even toying with the possibility of a hike within the next 12 months.

"The Bank is now likely to remain on hold until around August, when rate cuts will be needed to deal with a more concerning global and domestic economic environment," Evans said.

Still, the impact of lower mortgage costs and petrol prices combined to make households feel much better about their finances. The positive news even overcame fears of unemployment after the jobless rate jumped to 5.2 percent in March, its highest level in four years.

Rising Unemployment a Risk

The government will release its employment report for March on Thursday. Economists expect the economy to have shed 25,000 jobs in March and the jobless rate to rise to 5.4 percent as companies continue to cut costs in the face of easing demand, both at home and abroad.

Some fear the jobless rate could climb beyond 8 percent next year. That will keep pressure on the central bank to maintain an easy monetary policy bias, even though commercial banks are increasingly reluctant to pass reductions on to their customers.

On Tuesday, National Australia Bank said that due to high funding costs it would not be cutting its variable mortgage rates at all following the central bank's easing.

That drew the ire of Treasurer Wayne Swan, who said: "they do need a good kick up the bum occasionally. So, on this occasion, I'm not happy with it. The Prime Minister isn't happy with it. He's asked them to reconsider."

Still, the soothing effect of aggressively easy monetary policy was clear in the recovery in housing demand in February.

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Government data showed the number of home loans rose 0.4 percent in February from a month earlier. Government grants boosted the share of loans to first home buyers to 26.9 percent-- the highest since July 1991-- and up 66 percent over six months.

"In the near term, our view is that demand for home loans will continue to be underpinned by first home buyers, owing to the attractive grant, and improved housing affordability stemming from lower interest rates and falling house prices," said Helen Kevans, economist at JP Morgan.

"That said, further down the track, the massive wealth destruction that has occurred, tighter lending standards and, in particular, rising unemployment, will put a considerable dent in demand for housing finance."