Consumer sentiment dives to recession-era lows after RBA hike; Westpac expects another in November

Westpac's prediction of another rate increase in November, even after the drop in sentiment, indicates that the RBA views inflation risk as more significant than weak demand. This continues to provide support for Australian short-term bond yields and should cap downside for the Australian dollar when domestic data disappoints. Fuel prices are the main channel, so further rises in crude oil would intensify both inflation concerns and the burden on households. A rate-raising central bank encountering a household sector already at recession-like pessimism creates a risk of a bigger slowdown in consumer spending through 2027, according to markets.

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After seeing the Reserve Bank's latest rate increase, Australian consumers pushed confidence back to levels seen during recessions, but Westpac believes the central bank still has more to do.

Summary:

• The Westpac-Melbourne Institute Consumer Sentiment Index declined 4.7% in October to 80.4, down from 84.4.
• For those polled after the RBA decision, sentiment fell to 67.2, a figure that had only been recorded during the early 1990s recession.
• The cash rate now stands at 4.6%, the highest level since 2011, while petrol prices have climbed back above $2.30 a litre.
• More than 80% of those surveyed after the rate decision anticipate further increases in mortgage rates within the coming year.
• Westpac continues to forecast another rate hike at the RBA's November 2–3 meeting, pointing to fuel costs spreading into other areas and demand from AI and data centre investments.

Australian consumer confidence took a hit in October following the RBA's most recent rate rise, as the Westpac-Melbourne Institute index dropped 4.7% to 80.4 from 84.4 in the prior month.

This figure is among the 40 lowest since the survey started in the early 1970s. According to Westpac, there have been two other readings in that range this year, in April and June, representing the longest period of sustained weakness since the early 1990s recession. In 102 out of the 106 groups tracked by the survey, pessimists exceeded optimists.

The rate decision had an immediate impact. For those questioned before the announcement, sentiment stood at 86.9, a small increase from September. For those surveyed after, it dropped sharply to 67.2, a level that had only appeared in full surveys during the worst of the early 1990s recession. The difference of nearly 20 percentage points between the two groups is the widest since Westpac started recording daily responses in 2019.

The broader economic context accounts for the strain. The most recent increase pushed the cash rate to 4.6%, a level not seen since 2011, and Westpac forecasts the standard variable mortgage rate will exceed 9% for the first time since 2008. Meanwhile, the national average petrol price has risen back above $2.30 per litre, near April's high and up nearly 25% since the beginning of the year, as the Middle East conflict's energy shock continues to strain household budgets.

Consumers anticipate further rate increases. The survey's mortgage rate expectations index climbed 5.5% to just under its May high, and among those polled after the RBA decision, more than 80% believe mortgage rates will continue to rise over the next year, compared with 63% in September. Job concerns are also rising, as the unemployment expectations index is now clearly above its long-term average, but still far from previous highs. Westpac characterised consumers as nervous but not panicked.

Westpac noted that consumer concerns remain focused on living costs and interest rates, not on the job losses and bankruptcies that usually come with a recession.

Despite the confidence decline, Westpac expects the RBA to lift rates again at its November 2–3 meeting. The bank stated that rising fuel costs are beginning to affect prices of many goods and services, indicating that the upside inflation risks the RBA warned about are becoming real, and the board is also concerned about demand pressures from the AI and data centre investment surge.