RBA’s third rate cut for the year provides a clear confidence boost

According to the Westpac-Melbourne Institute survey, consumer sentiment increased 5.7% from 93.1 to 98.5 in August 2025; the strongest reading in three and a half years. The improvement reflected the RBA’s third rate cut of the year, alongside easing inflation and reduced tariff-related uncertainty. While multiple interest rate cuts are often a “double-edged sword” and reflect underlying weakness in the economy, the August rate cut appears to have renewed consumer optimism and highlights how responsive consumers are to positive news.

For retailers, the sentiment gains suggest discretionary spending momentum moving into the second half of 2025. Whilst sentiment has improved by 15.8% in the past 12 months it remains in slightly pessimistic territory, meaning pricing power remains constrained so margins pressure remains for retailers on the back of value-driven consumer behaviour. Building loyalty ahead of major sales events such as Black Friday will be critical to capturing that value-focussed spend.

The most recent ABS retail sales data showed a 1.2% increase in June 2025, up 4.9% year-on-year, largely driven by end-of-financial-year discounting in categories such as furniture, electrical goods, and clothing. Despite this boost, per capita volumes slipped 0.1% in the June quarter, highlighting subdued underlying demand. NAB Online Retail Sales increased 2.6% in June 2025 and 16.2% between June 2024 and June 2025.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac–Melbourne Institute Index, consumer sentiment increased 5.7% from 93.1 to 98.5 in August 2025. The increase was felt across all sub-indexes and reflects the impact of the RBA’s 0.25% rate cut in August to 3.6%, as well as more positive news around inflation and reduced tariff-related uncertainty. While the index remains marginally pessimistic, August reflects growth of 15.8% in the past twelve months and the highest sentiment reading in three and a half years and suggests the extended period of subdued confidence may finally be coming to an end.

All five of the subindexes increased in August 2025, led by:

• ‘economic conditions next 12mths’ up 7.6% to 101.2;

• ‘family finances vs a year ago’ up 6.2% to 84.2;

• ‘economic conditions next 5yrs’ up 5.4% to 98.4;

• ‘family finances next 12mths’ up 5.4% to 106.8; and

• ‘time to buy a major household item’ up 4.2% to 101.7.

The ‘time to buy a major household item’ sub-index now sits modestly above neutral territory suggesting consumers are regaining confidence to spend on discretionary goods, driven by lower borrowing costs and end-of-financial-year related discounting from retailers. Both short-term forward-looking sub-indexes are now in net positive territory; a positive indicator that households broadly expect conditions to improve over the next year. The short-term forward-looking sub-index recorded the largest gain of the month, rising 7.6% to 101.2, however it still reflects uncertainty about the longer-term outlook compared to the near term. ‘Family finances vs a year ago’ remains firmly in pessimistic territory at 84.2, highlighting the ongoing impact of cost-of-living pressures on household balance sheets.

Retailers are likely to see improved discretionary spending momentum heading into the second half of 2025, however given the consumer is still technically “pessimistic” it is likely that value will be required to open up wallets and managing inventory effectively will remain key until confidence decisively shifts into positive territory. Pricing power and margin expansion remain difficult for retailers given value-conscious consumers and ongoing cost pressures. The key focus for retailers will be to instil loyalty in anticipation for increased discretionary spending related to major sales events such as Black Friday.

Source: Australian Bureau of Statistics

The most recent ABS retail sales data recorded a 1.2% increase (seasonally adjusted) in June 2025, representing a c.4.9% or $1.7bn increase on June 2024. Growth in June was largely driven by end-of-financial-year discounting, particularly for non-food related items such as furniture, electrical goods, and clothing. Consumers continue to be value-focussed and seek attractive price points for big ticket items.

Most of the sub-categories experienced growth across the month:

• ‘household goods retailing’ up 2.3%;

• ‘department stores’ up 1.9%;

• ‘other retailing’ up 1.9%;

• ‘clothing, footwear and personal accessory retailing’ up 1.5%;

• 'food retailing’ up 0.9%;

• 'cafes, restaurants, and takeaway food services’ down 0.4%;
  

The rise in ‘department stores’ and ‘clothing, footwear and personal accessory retailing’ reflected stronger delayed winter clothing sales following an unseasonably warm end to Autumn. Gaming and electrical retailers in the ‘other retailing’ subcategory (+1.9%) benefited from the release of the Nintendo Switch 2, which became the fastest-selling Nintendo hardware launch to date in June. Food-related spending rose by 0.9% following two consecutive months of negative growth, while cafes, restaurants and takeaway food services was the only subcategory to record a decline, falling 0.4%. Despite the headline growth, per capita retail volumes fell 0.1% in the June quarter, underscoring subdued underlying demand.

The ABS Household Spending Indicator (ABS HSI) increased 0.5% in June 2025 (seasonally adjusted), reflective of 0.5% increases in both discretionary and non-discretionary spending. Discretionary growth was largely attributable to end-of-financial-year sales in vehicles, recreational goods, furniture, and household items. On an annual basis, non-discretionary is up 5.8% on June 2024, while discretionary spending is slightly softer, up 4.3%, reflecting the underlying cost of living pressure consumers are feeling.

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales in June 2025 increased by 2.6%, following a revised increase of 0.8% in May 2025 (previously 0.7%). Growth remained high in year-on-year terms, with seasonally adjusted sales increasing 16.2% between June 2024 and June 2025. Most categories showed growth in June led by ‘homewares and appliances’ (+6.5%) recovering from a decline in May, with consumers taking advantage of the EOFY sales with both volume and dollars spent increased. By state, South Australia led growth (+5.5%), with Tasmania (+4.3%) and Western Australia (+3.5%) also experiencing rebounds from last month. NAB data estimates Australians spent $64.19 billion on online retailing, making up 14.5% of total retail spend.