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Australia consumer sentiment improves in July as inflation falls

Investing.com -- Australian consumer sentiment improved from near record lows in early-July, a private survey showed on Tuesday, helped by softening inflation and as the Reserve Bank kept interest rates steady earlier in the month.

The Westpac Consumer Sentiment index rose 2.7% in June as expected, recovering from its worst levels since the 2020 COVID-19 pandemic after a sharp decline in sentiment earlier this year.

The reading was largely driven by a softer inflation print for May, Westpac said in a note. It also comes just a week after the Reserve Bank of Australia (RBA) kept its interest rates steady, offering some relief to consumers struggling with high mortgage and rental costs.

But Westpac noted that the RBA decision to hold rates had little bearing on consumer sentiment, given that July marked the second time this year that the bank had held rates steady. The RBA had hiked rates two more times after pausing in April, and also warned of more potential hikes despite a pause in July.

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Despite an improvement in sentiment through July, consumers still remained largely on edge over rising interest rates and worsening economic conditions. The Westpac sentiment index also remained close to 2020 lows, while the outlook for the economy, particularly the real estate market, remained bleak.

“The key message is that sentiment is probably not going to stage a sustained lift from current deeply pessimistic levels until inflation is much lower and interest rates are firmly on hold,” Bill Evans, chief economist at Westpac said in a note.

Westpac expects the RBA to hike rates at least two more times this year, in August and September, and to only begin cutting rates by May 2024.

The Australian economy is expected to cool substantially in the interim, as it comes under pressure from tight monetary conditions, as well as worsening conditions in major trading partner China.

Inflation is also expected to remain stubborn despite a drop in May, given that the Australian labor market is on a hot streak this year.

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