Tuesday, 17 January 2012

Consumer Sentiment in the Doldrums; Bank Costs Rise

The Westpac-Melbourne Institute Index of consumer sentiment recorded a medicine ball bounce of 2.4% in January after slumping 8.3% in December.  The index, at 97.1 points, is consistent with very weak growth in consumer spending and bodes poorly for non-mining economic growth in the early part of 2012.  That level of sentiment is consistent with real growth of about 1.5% for consumer spending, which if realised, is near historical lows.

The interest rate cuts in November and December have not been sufficiently positive for sentiment to offset whatever the other negatives.  This means quite clearly that the RBA will need to keep on cutting official interest rates.  Maybe consumers are erring on the side of pessimism because of falling house prices, a soggy stock market, rising unemployment, the global economic funk  - who can be sure.  But history shows, quite clearly, that when sentiment is depressed, so too is growth in spending.

Also supporting interest rate cuts in the months ahead is news that the large funding deal from CBA was painful.  Bloomberg reported it along the following lines:

"Commonwealth Bank of Australia sold $3.5 billion of five-year covered notes to yield 175 basis points more than swap rates yesterday in the biggest ever offering of financial debt in the currency. That's higher than the spreads paid by the nation's four biggest banks on benchmark domestic senior bonds in data compiled by Bloomberg since 1991."

Quite clearly, there is yet more evidence that bank funding costs are rising which will have implications for retail interest rates in Australia.  It seems all but certain that the gap between retail lending rates and the cash rate will rise quite a lot as these higher costs feed through.  This also argues for more interest rate cuts from the RBA in the months ahead as it targets the amount consumers and business pay and it works to stop the unemployment rate from rising towards 6%.    

1 comment:

  1. Is not rising bank funds a good reason to stay out of ordelay debt?