Aussies brush off RBA rate rise fears as confidence levels jump

Aussies’ concerns the economy will continue to struggle in the near future are failing to dampen spirits, with an uptick in consumer confidence recorded during March.

The latest Westpac-Melbourne Institute Consumer Sentiment Index shows people are feeling more positive despite the February interest rate hike, up 1.2% to 91.6 for March. 

Despite rising inflation in recent months, markets are largely anticipating the Reserve Bank will hold off on more tightening when the board meets next week.

Head of Australian macro-forecasting Matthew Hassan said consumers “are seeing a slight improvement in current conditions” this month, with much of that view centred on the outlook for interest rates.

The index factors in how borrowers feel about the short- and medium-term economic outlook, the timing of spending decisions, and how their family finances stack up compared with 12 months ago.

Though people are feeling more positive compared with earlier in the year, expectations for a harsher rate environment are high.

“There remains a strong consensus view that interest rates will rise further from here,” Mr Hassan said.

The Westpac-Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, declined 3.9% in March.

This gives back around a quarter of the surge seen in February, though expectations for higher repayments are locked in.

“Over 75% of consumers expect mortgage rates to increase over the next 12 months,” Mr Hassan said.

Consumers are also showing less confidence in the outlook for the labour market, reflective of RBA governor Michele Bullock’s recent comments around the difficulties the bank is facing with reliably forecasting.

An uptick of 3.8% on the index reveals more people expect unemployment to rise over the year ahead, a risk that could push the Reserve Bank to raise rates in order to balance its dual mandate to manage both.

Ahead of the RBA’s highly-anticipated decision next week, Mr Hassan noted war in the Middle East would likely keep the bank’s hand steady.

“While we continue to expect that the most likely timing for the next rate rise is May, a hike is likely to be on the table for discussion at the March meeting,” he said.

“Domestic developments have been mixed: growth coming in above the RBA’s expectations in 2025 but with some better news on supply capacity and the latest sentiment survey suggesting momentum is cooling across the consumer sector.

“However, the global backdrop has become much more unsettled. The conflict in the Middle East has impacted energy supplies and is casting major doubts over the outlook for growth.”

The index shows the escalating conflict in the Middle East is concerning for Australians, with 90% of consumers seeing the news from abroad as ‘unfavourable’. This is compared to 74% three months ago.

RBA governor Michele Bullock says it’s too early to know how Iran conflict will impact inflation in Australia. Picture: Martin Ollman

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Westpac noted the March readings are “very similar” to those seen around the time of Russia’s 2022 invasion of Ukraine.

“The RBA will be wary about how an associated spike in petrol prices feeds into inflation locally but will also be wary about making policy changes in the midst of a rapidly evolving and uncertain situation,” Mr Hassan said.

“On balance we believe it will opt to leave rates unchanged in March with the next rate rise coming a little later, once the dust has settled a bit.”

This article first appeared on Mortgage Choice and has been republished with permission.