Are Australian consumers heading for a fall because they have become overly optimistic? Or are they now more resilient than they were in the first few months of the year?

Yesterday we learned from the National Australia Bank’s latest monthly survey that that business confidence retreated slowly from six year highs, as business confidence also plateaued after a solid rise in recent months. Those outcomes came from a survey taken before last week’s rate rise from the Reserve Bank. What another rate rise might do remains open to question.

This morning we learned that the Westpac/Melbourne Institute Survey of consumer confidence for October, taken after the rate increase was revealed, showed a rise in sentiment to close to the highest level in 28 months.

It seems Australian households took the latest interest rate rise as a further sign of an improving economy, and sends a message to the Reserve Bank that they will withstand another rate rise or two in coming months.

But the outcome of the survey makes a mockery of the fear and loathing coverage on mortgage rates, housing affordability and the like in the wake of the central bank’s decision to start moving rates away from a level it has characterised as “emergency”.

The Westpac/Melbourne Institute Index of Consumer Sentiment rose by 1.7%, from 119.3 in September to 121.4 in October.

The index is 47.9% higher than its value a year ago (which is understandable given the fear and loathing that was abroad after Lehman Brothers fell over) and a fraction short of its June 2007 high of 121.5, which was on the eve of the eruption of the crunch in early August of the same year.

“This rise (in consumer sentiment) is significant since the survey follows the Reserve Bank’s decision to raise interest rates,” Westpac’s Chief Economist Bill Evans said in a statement this morning.

“However the result should come as no surprise. Evidence from the last tightening cycle, which began in May 2002, points to sentiment being resilient to rises while rates remain very low.”

Four of the five component indices improved in October with the largest improvement of 5.7% recorded by the component index reflecting economic conditions next 12 months.

Overall, the current conditions index rose by 2.7% and the expectations index increased by 1.1%.

Now the financial markets will look to a speech early tomorrow by Reserve Bank Governor, Glenn Stevens in Perth. It will be his first public appearance since last week’s decision to raise increase rates.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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