Rate cut expectations dashed! Australian consumer confidence plunged by 9% in December, raising interest rate hike alarms slated for 2026.

Consumer confidence in Australia plummeted in December, mainly due to the indication from the Reserve Bank of Australia that its temporary rate-cut cycle has come to an end and the possibility of a rate hike in 2026. The latest survey released by Westpac Bank on Tuesday showed a significant 9% drop in the consumer confidence index, which measures consumer economic sentiment, to 94.5 points. The number of pessimists once again exceeded optimists (with 100 as the dividing line). Notably, the index had previously shown a reading above the 100 mark for the first time since early 2022 in November, showing a significant contrast. Westpac Bank economist Ryan Wells stated, "Economic expectations worsened in December, almost completely reversing the gains seen in November." Market anxiety over the interest rate path has risen again and has further spread to the overall economic outlook. Last week, RBA Governor Michelle Brock emphasized that upward pressure on prices still exists, and the likelihood of further lowering borrowing costs "in the foreseeable future" is low. This decision-maker will focus on the CPI data for the fourth quarter, to be released at the end of January, to assess whether the current 3.6% interest rate level is sufficient to effectively curb inflation, or whether rate hikes are needed to further cool down the economy. The Westpac-Melbourne Institute Mortgage Rate Expectations Index (which measures consumers' expectations of variable mortgage rates over the next 12 months) has surged by 65.4% in the past three months, with a 22.2% increase in December alone. "This is the most dramatic reversal in mortgage rate expectations since we introduced the index in 2010," Wells said. "This is due to a decrease in expectations of rate cuts, while the number of people expecting rate hikes next year has increased." Wells also pointed out that despite the sharp turn in rate expectations, consumers overall do not feel uneasy about the labor market outlook. The Westpac-Melbourne Institute Unemployment Expectations Index dropped by 9.1% in December, to 126.8 (the higher the reading, the more consumers expect an increase in the unemployment rate in the next year). Other core sub-indices in this survey also showed significant fluctuations: - Future economic prospects index decreased by 9.7% to 94.6 - Timing to purchase major items index dropped by 11.4% to 98.9, returning to the mildly pessimistic range - Timing to purchase a house index fell by 10.6% to 86.2, reflecting a more "hawkish" view on interest rate prospects among consumers.