Australian Consumer Confidence Drops In June

Source from: The Australian Wed, 2010-06-09

AUSTRALIAN consumer sentiment dropped significantly for a second straight month in June, providing more evidence the Reserve Bank of Australia may remain on hold for the time being after raising rates aggressively in the past nine months.

For June, an index of consumer sentiment in Australia fell 5.7 per cent from May, following a 7 per cent drop the month before. The index fell to 101.9 points in June in seasonally adjusted terms from 108.0 points in May, compilers Westpac and the Melbourne Institute said today.

Westpac noted the two-month decline was the largest since March 2008.

Standing out in the report were concerns about international economic conditions, which registered the worst reading since the end of the global financial crisis.

Westpac chief economist Bill Evans said May's decline largely reflected the RBA's decision to raise interest rates three consecutive times to the current 4.5 per cent level. Last month, however, the RBA paused, with global concerns threatening to make that move indefinite.

Current 30-day interbank futures don't have another rate hike priced in until August 2011.

"With the bank leaving rates on hold in June, the decline in sentiment this month may not be due to rates," Mr Evans said.

"Instead it seems to reflect a mixture of concerns about deteriorating conditions abroad, financial market turmoil and uncertainty around the government's proposed resource super profits tax." To be sure, in annual terms, the consumer sentiment index rose a seasonally adjusted 1.8 per cent in June. In trend terms, the index fell 3.4 per cent from May, but remains up 5.5 per cent on an annual basis.

Kieran Davies, chief economist at RBS, said the sharp drop in June may be overstating the extent of the true deterioration, adding he still sees a high probability the RBA will come off the sidelines and start hiking rates in August once it sees second-quarter inflation data.

Still, he adds the major factor determining the next RBA decision will be events in Europe and the world economy generally, two factors that weighed on June's sentiment results.

ANZ strategist Tony Morriss said the consumer confidence report would be marginally positive for bonds and negative for the Australian dollar, a trend already being played out in the market.

Australian 3-year bond prices recently turned positive from a morning drop, rising 1 tick to 95.28. The Australian dollar traded at US82.17 cents, down from US82.77c earlier in the day.

"The global atmospherics are starting to weigh on people's views," said Mr Morriss.