Record-breaking jump in consumer sentiment following policy rate cut

The Gallup Consumer Confidence Index has never risen as much in a single month as it did this October, presumably due in large part to the policy rate cut at the beginning of the month. If inflation and interest rates continue falling until the year-end, sentiment could improve further, perhaps stimulating private consumption during the final months of the year.


The Gallup Consumer Confidence Index (CCI) took a quantum leap in October, with the biggest month-on-month increase since Gallup began compiling the index in early 2001. According to the newly published measurement, the CCI clocked in at 90.9, soaring by nearly 30 points since September, after sliding more or less unabated since the turn of the year. The rise is spread across the sub-indices that constitute the CCI, although expectations about the economy and labour market six months ahead rose particularly strongly.

Policy rate cut the probable driver

Gallup cites the early-October policy rate cut as a probable catalyst of this surge in the CCI, and we agree. Actually, It seems to us that in the CCI’s scant quarter-century history, policy rate cuts – particularly at the beginning of a monetary easing phase – have varied in terms of how positive an impact they make on consumer sentiment. But a number of additional factors must be considered in this context: the reasons for the rate cut (rate cuts due to the pandemic or to the darkening economic outlook after the collapse of WOW Air were hardly likely to give cause for cheer), whether or not the rate reduction was generally expected, and of course, the interest rate level before the policy rate was lowered.

At any rate, it seems to us that households and businesses have reacted positively to the October rate cut, not least because expectations of further monetary easing in coming quarters appear relatively widespread – that is, if yield curves in the bond market are any indication. It will be intriguing to see whether there is a change in executives’ responses in Gallup’s quarterly corporate expectations survey, which took a nosedive in September.

It is worth noting that the Central Bank (CBI) Monetary Policy Committee (MPC) has sometimes mentioned how much effect it can have to begin unwinding the policy rate, even at a cautious pace. The October spike in the CCI could be an indication that the rate cut has made quite a difference. If so, the MPC would probably be wise to abandon any ideas of taking a sizeable chunk out of the policy rate to start with. More incremental rate reductions would be the better option.

Why does the CCI show a difference between men’s and women’s expectations?

There was a marked gender-based difference in CCI measurements, as has often been the case in the past. Among male respondents, expectations shot up by more than 40 points MoM, and as regards sentiment on the economic situation and outlook, optimists now slightly outnumber pessimists. Among women, however, expectations rose by a more moderate 14 points, and as before, women tend to be more pessimistic than optimistic in their responses.

We have previously discussed the gender-based difference in CCI measurements. Since the index was introduced in Iceland, women have only been more upbeat than men seven times. The difference between the two groups is generally the smallest when respondents are pessimistic overall, and when the situation improves, men appear to be more bullish than women.

This is a well-known phenomenon far beyond Iceland’s borders, and a range of hypotheses have been suggested to account for it.

For instance, it has been pointed out that certain segments of the economy are relatively gender-segregated: men are more frequently employed in sectors such as construction, which usually rebound quickly when the economic outlook improves, while women are likelier to work in sectors such as education and healthcare, where upswings take more time to generate increased activity.

Furthermore, behavioural science research has shown that women tend to be more risk-averse than men and are thus more sensitive to uncertainty in the economy and labour market.

Finally, it has been demonstrated that women often worry more about the negative impact of high inflation than men do, perhaps because they are more heavily involved in running the home and making household purchasing decisions.

Will consumer sentiment continue to improve as interest rates and inflation taper off?

It will be interesting to keep abreast of movements in the CCI in the months just ahead. For instance, the October measurement was taken before the collapse of the Government. Presumably, the upcoming election campaign will affect voters’ expectations. Our previous analysis indicates that the CCI has generally risen during the run-up to Parliamentary elections, and we suspect that candidates’ campaign promises have played a role in that trend. Moreover, the next inflation measurement and the 20 November policy rate decision will probably affect sentiment, especially if interest rates and inflation keep falling through the year-end, as is currently expected. Such a turn of events could support private consumption in the final months of the year, as the CCI and private consumption have tended to track one another fairly strongly in the past.

Analyst


Jón Bjarki Bentsson

Chief economist


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