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RBA rate cuts losing their mojo: survey

AAP logoAAP 10/08/2016 Marty Silk

The Reserve Bank's interest rate cuts could be losing their mojo.

The Westpac Melbourne Institute Index of Consumer Sentiment rose by just 2.0 per cent to a level of 101.0 points in August, from 99.1 points in July.

Westpac chief economist Bill Evans said the survey was conducted during the period in which the Reserve Bank cut its key interest rate to a record low of 1.50 per cent, so the response of consumers to it was extremely muted.

After the May rate cut, the consumer confidence index rallied 8.5 per cent.

"Firstly, there was a larger surprise element to the May decision with, arguably, significantly less intense media speculation than we saw in August," Mr Evans said in a note.

"Secondly, the standard variable mortgage rate offered by most banks was reduced by the full 0.25 per cent, (in May) whereas in August, the four major banks only reduced variable rates by 0.10-0.14 percentage points.

"Finally, the Index was coming from a significantly lower starting point in May (95.1) than in August (99.1)."

In the past, RBA rate cuts have inspired confidence in consumers because borrowers expected their banks to pass on those cuts, lowering their interest repayments.

But Westpac's index shows that most consumers have given up hoping for any more relief on their debt repayments in the next year, even if Reserve Bank cuts its interest rate further.

"In our special question around the outlook for mortgage rates, 37 per cent of respondents expect mortgage rates to rise over the next 12 months; 36 per cent expect rates to be steady; and just 27 per cent expect further rate cuts," Mr Evans added.

In other words, consumers are realising the RBA can't force banks to pass on official interest rate cuts, meaning their impact on confidence is rapidly deteriorating.

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