Westpac’s call for a November follow-up hike, despite the sentiment slump, signals that inflation risk still outweighs demand weakness for the RBA. That keeps support under Australian short-end yields and should limit downside for the Australian dollar on soft domestic data. Fuel is the key transmission channel, so further gains in crude prices would sharpen both the inflation pressure and the squeeze on consumers. The risk for markets is that a rate-hiking central bank meets a household sector already at recession-level gloom, raising the odds of a sharper slowdown in consumer spending into 2027.

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Australian households took one look at the RBA’s latest hike and sent sentiment to recession-era lows, yet Westpac reckons the central bank isn’t finished.

Summary:

• The Westpac-Melbourne Institute Consumer Sentiment Index fell 4.7% to 80.4 in October from 84.4.
• Sentiment dropped to 67.2 among those surveyed after the RBA hike, a level previously seen only in the early 1990s recession.
• The cash rate is at 4.6%, the highest since 2011, and petrol is back above $2.30 a litre.
• Just over 80% of post-decision respondents expect mortgage rates to rise further over the next year.
• Westpac still expects the RBA to hike again at its November 2–3 meeting, citing fuel costs flowing into broader prices and AI-driven demand pressures.

Australian consumer sentiment slumped in October after the Reserve Bank of Australia’s latest rate hike, with the Westpac-Melbourne Institute Consumer Sentiment Index falling 4.7% to 80.4 from 84.4 in September.

The reading ranks among the 40 weakest since the monthly survey began in the early 1970s. Westpac said this year has already produced two other readings in that group, in April and June, marking the worst stretch of persistently weak sentiment since the early 1990s recession. Pessimists outnumbered optimists in 102 of the 106 population groups the survey tracks.

The RBA decision appears to have had an immediate effect. Among respondents surveyed before the announcement, sentiment was 86.9, slightly up on September. Among those surveyed afterwards, it plunged to 67.2, a level previously seen in complete surveys only during the depths of the early 1990s recession. The gap of nearly 20% between the two groups is the largest since Westpac began tracking daily responses in 2019.

The macro backdrop explains the pressure. The latest hike took the cash rate to 4.6%, its highest since 2011, and Westpac expects the standard variable mortgage rate to rise above 9% for the first time since 2008. At the same time, national average petrol prices have climbed back above $2.30 a litre, close to April’s peak and up almost 25% since the start of the year, as the energy shock from the Middle East conflict continues to hit household budgets.

Consumers expect more of the same. The survey’s mortgage rate expectations index rose 5.5% to just below its May peak, and among those surveyed after the RBA decision, just over 80% expect mortgage rates to rise further over the next year, up from 63% in September. Concerns about jobs are also creeping higher, with the unemployment expectations index now clearly above its long-run average, though still well short of past peaks. Westpac described consumers as on edge rather than alarmed.

Westpac said consumers’ worries still centre mainly on the cost of living and interest rates rather than the job losses and insolvencies typical of a recession.

Despite the sentiment hit, Westpac expects the RBA to raise rates again at its next meeting on November 2 and 3. It said higher fuel costs are starting to feed into prices across a wider range of goods and services, a sign that upside inflation risks flagged by the central bank are materialising, while the board is also wary of demand pressures from the AI and data centre investment boom.

This article was written by Eamonn Sheridan at investinglive.com.