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Rate cuts may be needed to boost sentiment

Gloom has set in among Australian consumers and businesses in the lead up to Christmas, fuelling hopes of further interest rate cuts to boost confidence in 2013.

The Westpac/Melbourne Institute Index of Consumer Sentiment for December, released on Wednesday, fell 4.1 per cent to 100.0 points.

A reading of 100 indicates equal numbers of pessimists and optimists among respondents.

The fall comes a day after National Australia Bank's (NAB) monthly business survey showed business confidence had slumped to its lowest level since April 2009.

NAB senior economist Spiros Papadopoulos said weak sentiment among consumers and businesses could see the Reserve Bank of Australia cut the cash rate to record lows in 2013.

"Until we see a turnaround in both business and consumer confidence the RBA will retain an easing bias," he said.

"We expect a further cut in the first half of 2013, but if the weakness in confidence and conditions continues, the RBA will have to cut more than once next year."

The RBA cut the cash rate by a quarter per cent to three per cent, its lowest level since 2009, at its monthly board meeting on December 4.

Citibank economist Paul Brennan said it appeared negativity surrounding the global and Australian economies was getting to consumers.

"There is only so much euro zone crisis, US fiscal cliff, domestic political bickering, headlines about the end of the mining investment boom and uncertainty about the economic outlook that people can take," he said.

He said the RBA should do more to stimulate the economy and called on the federal government to abandon its efforts to cut government spending and return the federal budget to surplus in the current financial year.

"It should be a wake-up call that more needs to be done by both fiscal and monetary policy."

Westpac chief economist Bill Evans said the fall in consumer confidence was surprising.

"It was reasonable to expect that the index would respond quite positively to the rate cut the Reserve Bank delivered last week," he said.

Mr Evans said confidence had risen among consumers who had a mortgage (up 4.4 per cent), but that was offset by pessimism among other respondents, including those who are renting properties (down 9.1 per cent) and those who wholly own their own home (down 10.9 per cent).

The fall in consumer sentiment follows three months of consecutive rises in the index.