Australia's bank says consumers hurt by latest interest rate rise

15:56, May 19, 2010      

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Australian consumer sentiment has dropped sharply in response to the latest rise in interest rates and to last week's federal budget, Australia's bank Westpac said on Wednesday.

"We expect that the most important factor causing such a large fall in the headline index was the rate hike," Westpac chief economist Bill Evans said releasing the data, adding that the Westpac-Melbourne Institute consumer sentiment index fell seven percent in May.

The Reserve Bank raised the cash rate by a further 25 basis points to 4.5 percent earlier in May, the third consecutive monthly increase and sixth since October last year.

The latest increase took the average standard variable mortgage rate to 7.3 percent, an area that has historically caused a downturn in sentiment.

"We are clearly back in that range for the variable mortgage rate where future rate hikes are going to hurt consumers and the index can be expected to respond accordingly," Evans said.

On the budget, respondents were asked a how it would impact on their family finances.

Fifty-one percent indicated that the budget would have little impact, 27 percent said it would worsen their finances and only 11 percent said they would improve. Ten percent did not know.

Highlighting the impact of rising interest rates, the Time to Buy a Dwelling index fell 15.4 percent to be 35.6 percent below its long run average.

It has fallen 40 percent since its peak in August 2009.

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