Australian Consumer Sentiment Boosted by Expected Tax Cuts and Steady Interest Rates

Summary

  • Consumer sentiment in Australia shows a significant increase in early February according to a private survey released on Tuesday.
  • The rise in sentiment is largely due to hopes that the Reserve Bank of Australia (RBA) would refrain from further interest rate hikes, coupled with the government’s planned tax cuts.
  • New changes to the government’s proposed tax reforms could lead to increased income tax reductions for middle and low-income earners, further contributing to consumer optimism.
  • However, despite this increase, consumer sentiment is still recovering from sharp drops over the past two years due to high inflation and rising interest rates.

Consumer Confidence Boost in Australia

A private survey revealed on Tuesday that consumer sentiment in Australia showed a substantial improvement in early February. The optimism was largely spurred by the belief that the RBA had concluded its interest rate hikes, along with the impact of proposed tax cuts by the government.

The consumer sentiment recorded a 6.2% leap to a 20-month high in February, marking the largest increase in 10 months, and a significant recovery from near-record lows.

Signs of Stabilising Interest Rates

The primary factor stoking this rise in sentiment is the growing expectation that the Reserve Bank was completed with raising interest rates. Westpac analysts identified the recent softer inflation figures for the last quarter and December as justification for this view.

Matthew Hassan, Senior Economist at Westpac Group, indicated that the rally remained tentative, with a noticeable drop among respondents following the February policy decision by the RBA.

The RBA has previously indicated that persistently high inflation could necessitate further interest hikes, but rates have been steady since November.

Outlook on Rate Stability and Tax Cuts

Despite the bank’s apparent inclination towards hike, analysts predict that the RBA is likely to hold steady on rates in the near future, particularly if inflation continues its downward course.

The planned revisions to the government’s tax cuts this year also fostered consumer sentiment in February. These reforms lead to increased optimism among middle-income earners.

Tax Cuts Announced

Australian Prime Minister Anthony Albanese pledged to reduce taxes to combat rising inflation and stagnated wage growth due to the COVID-19 pandemic. He recently hinted at changes that would potentially see greater income tax cuts for low and middle-income earners.

Recovery yet to Match Previous Peaks

Although consumer sentiment experienced a marked improvement in February, it is still on the road to recovery from severe declines over the past couple of years, which can be attributed to high inflation and hiking interest rates.

The Westpac-Melbourne Institute index is still some ways off the peaks achieved during the ultra-low interest rate environment of 2021, with levels close to the lows of 2020.

Consumer Optimism

Nonetheless, Tuesday’s survey demonstrated growing consumer optimism about the Australian economy’s prospects in 2024.

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