Let’s make one thing very clear, the Reserve Bank wants us all, individuals and businesses of shapes and sizes to feel very, very scared. So scared in fact that we cut back on spending, investing, buying homes and retreat and keep our wallets closed, cheque accounts quiet, and suffer.

We will have to be alarmed, not alert; unhappy and worried. The Australia Institute is going to have a field day. It’s the only way the central bank can influence inflationary expectations lower, a key part of its strategy which started with last week’s rate rise and was fleshed out Monday with the first Monetary Policy Statement of the year.

But as the first major business survey of the year from the National Australia Bank shows, the RBA may have picked up the wrong stick with which to club the economy into submission and today more confirmation that individual consumers are worried, perhaps more worried than the RBA thought.

Consumer sentiment fell sharply for a second straight month in February and is now at a point where the pessimists outnumber optimists.

The Westpac-Melbourne Institute consumer sentiment index fell 5.5% in February to 97.4, on top of January’s sharp 8.3% fall. That left the index 12.6% lower than in February last year and 15.5% below its 2007 average. It was also the first drop below 100.0 since September 2006.

The survey of 1,200 consumers was taken in the wake of Tuesday of last week’s 0.25% lift in the cash rate by the RBA, but before the very hawkish and gloomy Monetary Policy Statement on Monday of this week in which the RBA warned of more rate rises and high inflation for two years. But the gloom is only short term and that’s not want to RBA wants to see.

The survey showed families believe their finances are going to improve over the next year, while those surveyed believe things will improve over the next five years and most worrying of all, the index of expectations fell by only 0.1%, compared to a 13.1% fall in the current conditions index. The RBA would like to see a very sharp fall in the index of expectations.

The NAB survey showed that business was gloomier than consumers, but there were question marks over how long that would last. Companies are becoming worried about deterioration in global financial markets and business confidence fell to its lowest level since 2001 last month. And business investment is tipped to fall in coming months after confidence levels recorded the biggest six month slide in a decade.

And a warning as well from the chief strategist at the AMP, Dr Shane Oliver

He wrote yesterday:

More broadly, a growing risk for the Australian housing market is that the RBA ends up going too far on interest rates triggering broader economic problems and feeding back to increased mortgage stress, rising delinquencies and forced sales putting generalised downwards pressure on house prices. Today’s data showing a new record low for housing affordability (according to the Commonwealth Bank/HIA Housing Affordability report) and a further sharp fall in business confidence (according to the latest National Australia Bank’s business survey) highlight the growing risks to the economic outlook.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey