Confidence drops as interest rates increase

In what should come as good news for the Reserve Bank, consumer confidence has taken a dive.

The ANZ-ROY Morgan Consumer Confidence Index fell 5 points in November to 80.7, its lowest level since June.

“Sharp increases in the cost of living and interest rates [not to mention falling house prices] are clearly hurting confidence, but excellent job security and strong wage growth have so far seen spending hold up far better than this level of confidence would normally imply”, said ANZ chief economist Sharon Zollner.

“This dynamic is likely to be borrowed time.”

This week Reserve Bank governor Adrian Orr warned New Zealanders that they needed to curb their spending to help fight inflation and avoid a more serious economic downturn.

The signs of slowing confidence suggest its policy path of rate hikes is starting to gain traction.

“At its Monetary Policy Statement this week the Reserve Bank made it clear that they need to see much lower spending growth in order to bring down persistently high inflation,” Zollner said.

“So far, they’ve been struggling to get traction with households who have been feeling confident about the income side of the equation. But the RBNZ upped the freak-out factor considerably this week with their forecasts of much higher interest rates, much lower growth, and unemployment reaching 5.7 per cent.”

“The reverberations of that seem likely to show up in the data relatively quickly. Watch this space.

“Overall, while consumer spending has been remarkably resilient, we suspect that this dynamic is due to peter out fairly soon as more and more households roll onto sharply higher mortgage rates and the flow-on effects of the ongoing slowing in the housing market become harder to miss.”

The Reserve Bank will certainly be hoping so.

“Consumer inflation expectations lifted from 5 per cent to 5.3 per cent this month, breaking a downward trend, in what will be unwelcome news for the Reserve Bank.

“Consumers don’t set prices, but in a tight labour market, they have more wage-bargaining power, which makes their inflation expectations highly pertinent in a world where the RBNZ is seeing unwelcome inflation feedback loops emerge.

“Further, if consumers expect inflation, it makes it easier for businesses to pass on cost increases, all else equal.”