Rate rises and war push consumer confidence into death spiral

The combination of spiralling petrol prices, the war in Iran and the Reserve Bank’s latest interest rate rise has crashed consumer confidence to its lowest level on record.

In what points to a sharp contraction in household spending that could hurt the entire economy, the ANZ-Roy Morgan weekly measure of consumer sentiment dropped 5.4 points over the past seven days.

The measure, released this morning, has now fallen 20 per cent since the war against Iran began. It is at its lowest level since the measure was created in 1973 during the first oil shock.

Expectations about inflation have soared to reach 6.9 per cent, higher than it hit during the post-pandemic inflation surge.

ANZ economist Sophia Angala said the sharp fall in confidence was largely due to the lift in oil prices and the Reserve Bank’s decision last week to push official interest rates up to 4.1 per cent.

“With very large increases in petrol prices through March, inflation expectations rose to an all-time high last week,” she said.

“Household confidence in their current and future finances weakened sharply, as did the ‘time to buy a major household item’ subindex, which is at its lowest since late March 2020 when pandemic lockdowns were announced.”

Consumers are not only worried about inflation and the immediate hit to the economy. Expectations around the economy over the next 12 months fell another 3.9 points while the measure of whether it is a good time to buy a major household item plummeted 9.5 points.

The index was released after the Council of Financial Regulators, which is made up of the Reserve Bank, federal Treasury, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, expressed concern about the war’s impact on the nation’s financial system.

“The council noted that while direct exposures of the Australian financial system to the Middle East were limited, a further deterioration of the geopolitical environment could heighten risks to financial stability and requires continuing vigilance,” it said in minutes of its Monday meeting.

“Council members observed that the Australian financial system has established a good degree of resilience and is well-placed to navigate a high-risk international environment.

“It is important, however, that banks maintain strong levels of capital and liquidity, in the context of wider council-industry efforts to strengthen crisis preparedness arrangements.”

There are concerns that the RBA’s most recent rate rise will weigh heavily on some borrowers.

The council warned the nation’s commercial banks they needed to maintain high lending standards.

“The council also noted that most borrowers in Australia are in a solid financial position and remain able to manage increases in cost pressures, though some will face growing challenges,” it said.