Almost half of households plan to spend less on Christmas gifts this year after the November interest rate hike and fears of further financial pain delivered a hefty blow to consumer confidence.
Two indices that track consumer sentiment both fell sharply following the Reserve Bank of Australia's decision to lift the official cash rate to 4.35 per cent.
The Westpac-Melbourne Institute consumer sentiment index plunged 6 per cent in the immediate aftermath of the rates decision and settled at 79.9 points, while the ANZ-Roy Morgan consumer confidence index fell 3.5 points to 74.3 points, its weakest reading in four months.
Westpac Group senior economist Matthew Hassan said the slump in mood was "an ominous sign" for retailers heading into the pre-Christmas shopping period.
Even before the latest rate hike, households were pulling back on discretionary spending and although events like the Black Friday sales may encourage a jump in purchases economists think the effect will be short-lived.
Mr Hassan said the the results of the survey showed the gloomy outlook of consumers was having a major bearing on their attitudes to spending.
"Responses point to another penny pinching Christmas this year, with nearly 40 per cent of consumers planning to spend less on gifts than last year," Mr Hassan said.
He said the downbeat response was in line with that observed at the same point last year, and was significantly greater than long-term average of around 33 per cent.
The indices show that people are not only being affected by the rate rises made to date, but are worried about the outlook.
ANZ senior economist Adelaide Timbrell said the ANZ-Roy Morgan index showed confidence in prospects for the economy in the next five years has dropped to its lowest point since the early stages of the pandemic in April 2020.
"This suggests that the RBA hike may have been a negative economic signal for some households," Ms Timbrell said.
Mr Hassan said consumers were wary of the potential for more rate hikes.
Almost 75 per cent of those surveyed for the Westpac-Melbourne Institute index expect further monetary policy tightening in the next 12 months and just 4 per cent think there will be rate cuts.
The November rate hike had hit the confidence of households with a mortgage particularly hard, Mr Hassan said, with expectations about finances over the coming year especially weak among this group and prospects for the economy over the next five years downgraded to its lowest level in a year.
The Westpac economist said the survey results highlighted the differing impact high interest rates were having on households across the economy.
"The [survey] points to a widening gap between segments that are struggling with rate increases and the rising cost of living and those that are less exposed to these issues and benefitting from higher returns on deposits and appreciating house prices," he said.
"Family finances and buyer attitudes are coming under intense pressure across the mortgage belt but have firmed amongst those in older age groups, high income earners and those with investment properties."
The insight highlights the limitations of using interest rates as a tool to tackle inflation, with the financial burden falling heaviest on those carrying the most debt, including those who have only recently purchased a home.
But whether longer term pessimism about prospects for interest rates and the economy is warranted is contested.
Though some economists think more rate hikes are needed, that is far from a universal view.
The markets think there is less than a 60 per cent chance of another rate hike at any point in the next 12 months and some such as CommBank chief economist Stephen Halmarick expect rates to begin coming down later in 2024.