Westpac-MI Consumer Sentiment Index in Australia witnessed a modest 2.7% mom increase in July, rising to 81.3. However, the index remains entrenched the deeply pessimistic territory, a condition that has prevailed for over a year now.
According to Westpac, the main driving force behind this month’s uplift is easing in monthly inflation, which dipped from 6.8% in April to 5.6% in May.
RBA decision to pause in July, however, failed to instill confidence. In fact, the sentiment was considerably more buoyant before the decision, with an index reading of 88, marking an 11.2% rise from June. Post-RBA responses, on the other hand, presented a combined index reading of 77.9, a dip of -11.6% from the pre-RBA sample and a -1.6% fall from June’s reading.
Westpac’s key message is clear: “Sentiment is probably not going to stage a sustained lift from current deeply pessimistic levels until inflation is much lower and interest rates are firmly on hold.”
Looking ahead to the RBA’s next meeting on August 1, Westpac expects that if annual underlying inflation prints around 6.1% for the June quarter, and if the unemployment rate continues to hold well below full employment, the case for higher rates will be clear.
As such, Westpac anticipates that RBA Board will raise cash rate by 0.25% at both August and September Board meetings, followed by a prolonged pause. The first rate cut in the subsequent easing cycle is expected next May.