Australian Consumer Confidence Plunges as Higher Inflation Looms

Shoppers walk around Pitt Street Mall in Sydney, Australia, on June 7, 2022. Brendon Thorne/Getty Images

More and more Australian consumers are losing confidence in the economic outlook as the Reserve Bank of Australia (RBA) warns higher inflation and further interest rate hikes are on the horizon.

The Westpac-Melbourne Institute survey indicated that the consumer sentiment index dropped 4.5 percent to 86.4 in June following the RBA’s decision to raise the cash rate to 0.85 percent from 0.35 percent previously.

Westpac chief economist Bill Evans noted that over the 46-year history of the survey, there had been only five times that the consumer sentiment index was at or lower than the above level, including the COVID-19 pandemic and economic recessions in the 1980s and 1990s.

In addition, another survey by the ANZ and Roy Morgan showed that consumer confidence plummeted 7.6 percent to 80.4 points in the week commencing June 6, hitting the lowest level since April 2020.

David Plank, the head of Australian economics at ANZ bank, said that only 10 percent of the respondents expected the Australian economy to have “good times” in the next five years, the lowest level ever recorded.

The pessimistic sentiment comes after the RBA governor Philip Lowe warned inflation could soar to seven percent by the end of 2022, triggering more interest rate increases to stabilise the economy.

The governor emphasised that the central bank needed to take decisive action to curb ballooning inflation.

“We'll do what’s necessary to get inflation back to two to three percent,” Lowe said in an ABC television interview on June 14.

“I’m confident we can do that, but it’s going to take time.”

Lowe also said the RBA could lift the cash rate to 2.5 percent.

The Reserve Bank of Australia building is seen in Sydney, Australia, on May 3, 2022. Saeed Khan/AFP via Getty Images

Meanwhile, Evans said rising inflation would cause problems for the Australian economy.

“The RBA needs to normalise policy quickly to begin to address this very disturbing challenge,” he said.

“Another 50 basis points in July will be a further decisive step in this process.”

Lowe’s warning emerged as global share markets plunged due to fears that the U.S. Federal Reserve would aggressively lift interest rates to combat inflation, causing the world’s largest economy to fall into recession.

The U.S. inflation rate has soared to 8.6 percent, reaching the highest level in 40 years.

However, the RBA governor said the Australian economy would continue to see robust growth in the next six to 12 months.

“There is still a bounce back from all the COVID-19 restrictions. People are spending in a way they weren’t able to do last year,” he said.

Lowe also noted that the construction sector still had a large backlog of unstarted work, and job vacancies were at very high levels.

“So people can be confident the jobs will be there, and in that environment, people will keep spending,” he said.