Did the RBA's rate rise shock Australian consumers?

Consumer confidence fell sharply following the Reserve Bank's September interest rate increase, with an extraordinary difference between survey responses collected before and after the decision.

The October Westpac–Melbourne Institute Consumer Sentiment Index fell 4.7% to 80.4, from 84.4 in September.

But the headline figure conceals a much more dramatic movement.

Consumers surveyed before the RBA's 29 September decision recorded a sentiment index of 86.9. Those surveyed afterwards recorded just 67.2 — a difference of 19.7 index points.

Westpac reports that this was the largest pre- and post-decision deterioration since it began tracking daily survey responses in 2019.

The RBA increased the cash rate by 25 basis points to 4.60%, citing persistent inflation and capacity pressures.

Other survey findings reinforce the deterioration. More than 80% of consumers expect mortgage rates to rise over the coming year, while pessimists outnumber optimists across 102 of the survey's 106 demographic and economic subgroups.

There is an important qualification. The survey compares different respondents, not the same households before and after the decision. It therefore cannot establish that the rate increase caused the entire decline.

Nevertheless, the result highlights the RBA's dilemma. Inflation remains above target, but households are becoming increasingly pessimistic.

The critical question is whether this confidence shock translates into weaker spending and employment — potentially doing more to restrain demand than the RBA intended.