Falling interest rates are scaring Australians, with confidence falling to a four-year low and many retirees struggling to generate an income from their nest eggs.
Confidence in the economy has hit its lowest point since July 2015, according to the latest Westpac consumer sentiment survey.
Confidence plummeted 5.5 per cent in October, above and beyond the forecast 0.3 per cent decline, after the Reserve Bank of Australia (RBA) cut the official interest rate for the third time this year, this time to 0.75 per cent, with further cuts forecast.
Commonwealth Bank senior economist Belinda Allen said the results showed that rate cuts were actually scaring Australians and that that negativity was likely to weigh further on the economy.
Consumer confidence is continuing to plummet, down a dramatic 5.5 per cent in October to a four-year low, according to the Westpac survey.
“Consumer sentiment has fallen after each rate cut by the RBA and the reaction has been larger after each subsequent rate reduction,” Ms Allen told Business Insider Australia. “The falls have been 0.6 per cent, 4.1 per cent and 5.5 per cent after the June, July and October decisions respectively.”
Ironically, that’s the opposite of what the RBA had hoped would happen, she added. Lower rates typically encourage spending, but as the economy has continued to weaken, they appear to be scaring Australians.
“There had been hope that lower interest rates, tax rebates and now rising house prices would help elicit an improvement in consumer spending in late 2019,” Ms Allen said.
“Persistently weak consumer sentiment does raise the risk that we do not see an ongoing lift in consumer spending. The RBA has noted it expects to see half of the rebate spent and half to be saved. A more negative view of family finances apparent in the sentiment figure does place this expectation at risk.”
Breaking down the survey, Australians are particularly anxious about where the economy will be in 12 months and five years.
Superannuation research house SuperRatings said late last week that while superannuation fund pension returns had held up well as official interest rates had fallen this year, it was a challenge for funds to deliver income to those in retirement.
The hunt for yield was intensifying, he said.
“Pension returns are holding up well,” he said, “but the split between capital gains and income is critical for retirees, because they rely on income streams to fund activities in retirement.
“Over the past few years, we’ve seen super funds steadily reduce their allocation to bonds in favour of other income-generating assets like alternatives and property in order to generate their required yield.
“We expect this theme to continue to play out as rates remain low and possibly move lower over the next year or two.”
In light of the Westpac survey, Ms Allen said CommBank believed the Government needed to spend more to take the pressure off the RBA to right the economy
“We have been saying for a long time now that extra fiscal support in the way of further personal income tax cuts and more infrastructure spending would be more beneficial than taking the cash rate lower,” she said. “The evidence on the efficacy of lower interest rates is sending some negative signals.”
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