Consumer sentiment has jumped amid signs that national and international inflation pressures are easing and wage growth is strengthening.
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The Westpac-Melbourne Institute Consumer Sentiment Index, which aims to gauge the mood of households about the economy, increased by 5 per cent this month - its biggest improvement in almost two years.
While the index shows people remain deeply pessimistic about conditions, their outlook has brightened a little since crashing in November to levels close to those experienced in the depths of the pandemic.
Westpac chief economist Bill Evans said the absence of a January rate hike (the Reserve Bank of Australia Board does not meet this month) was likely met with some relief by consumers.
"After eight [rate rises] in a row you are entitled to get excited about not getting one," Mr Evans said.
Mounting evidence that inflation pressures are easing both in Australia and internationally is fueling speculation that interest rates are getting close to their peak, if they are not there already.
Both the United States and the European Union have recorded declines in headline inflation. In the US it dropped to 6.5 per cent in December after reaching 9.1 per cent in June. In the eurozone it eased to 9.2 per cent last month after being at 10.1 per cent in November.
Unseasonably warm weather in Europe has also dampened demand for gas to the extent that prices have dropped to the lowest point in 16 months.
Meanwhile, global shipping costs have plummeted to around a fifth of the levels reached at the height of the pandemic.
Locally, there is evidence that housing construction costs, which have been a big contributor to inflation in Australia, are slowing dramatically.
The Cordell Construction Cost Index increased 1.9 per cent in the December quarter, down from a 4.7 per cent jump in the previous three months.
CoreLogic research director Tim Lawless said the decline would feed in to reduced price pressures in construction.
HSBC Australia chief economist Paul Bloxham said the promising developments added to the chances that official interest rates have reached their peak.
Mr Bloxham said that while the RBA was worried about inflation and was concerned about the risk the tight labour market could drive excessive wage growth, it was also keen to avoid pushing the economy into recession.
He said that the RBA's long experience with targeting inflation made it more willing than some other central banks to have periods where inflation was above or below its target band, and as a consequence was less aggressive in it policymaking than others.
"I am of the view the RBA is not going to do that much [on interest rates] this year," he said, predicting the central bank will hold the cash rate steady at its February 7 Board meeting.
Mr Evans, however, expects the interest rate to reach 3.85 per cent by May - a 0.75 percentage increase - before pausing.
He said in the second half of the year the growth would be "flat", annual inflation will be down to 3.9 per cent and the momentum of price pressures will have slowed, giving the RBA room to hold rates steady before making a rate cut in the March quarter of 2024.
Mr Evans warned, though, not to expect a series of rate cuts, saying an interest rate of around 2.85 per cent would be close to neutral.
