RBA surprise halts the improvement in consumer sentiment

Consumer sentiment increased by 0.6% to 93.1 in July 2025, according to the Westpac–Melbourne Institute Index of Consumer Sentiment. The RBA’s decision to hold rates at 3.85% came as a surprise to many consumers, with the index tracking up to 95.6 ahead of the RBA meeting then falling to 92.0 post the RBA announcement. This shows that consumers are very eager to latch onto good news but a delay in the good news quickly dampens the enthusiasm. Sentiment over the past few months has looked like spiking only to be slowed by unexpected news such as tariff announcements, or interest rate holds instead of cuts. We liken the current situation to an athlete at the starting gate eager to set off. We expect a spike in sentiment once there is an interest rate cut, and if it comes without any countering news from the global economy, it could be material.

The most recent ABS retail sales increased by 0.2% (seasonally adjusted) in May 2025 as some shoppers began taking advantage of early end-of-financial year discounts and cooler than expected temperatures leading into winter, prompting more spending on winter apparel. NAB Online Retail Sales increased in May, continuing the momentum seen in April 2025 (+1.1%).

Retailers can expect consumers to remain cautious in the near term following the EOFY sales period. Profitability pressures will become a key focus for retailers as retail price growth has slowed to 0.6% in June 2025, its lowest level since early 2023, according to the NAB Business Survey. In the meantime, retailers should concentrate on managing costs and inventory while preparing for the next sales period, which will hopefully be supported by further rate cuts and a clearer broader economic outlook.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac-Melbourne Institute Index, consumer sentiment increased 0.6% from 92.6 to 93.1 in July 2025. The survey was conducted during the week of the RBA holding the cash rate at 3.85%, with a dip in sentiment post-announcement. The survey detail showed that consumers did not anticipate the RBA’s decision as the index tracked up (95.6) ahead of the meeting and fell to 92.0 post the RBA announcement. At 93.1, the index remains in pessimistic territory, with sentiment still below the neutral level of 100, but 12.6% higher than July 2024.

Although the overall index increased, only three of the five sub-indexes improved in July 2025:

• ‘family finances vs a year ago’ up 5.0% to 79.2;

• ‘family finances next 12mths’ up 2.6% to 101.4;

• ‘economic conditions next 12mths’ up 1.8% to 94.1;

• ‘economic conditions next 5yrs’ down 2.8% to 93.4; and

• ‘time to buy a major household item’ down 2.6% to 97.6.

The increase in the ‘family finances’ indices suggests that consumers are feeling better about their current and future financial positions. This also shows that despite the disappointment of the RBA’s July surprise, consumers have become more confident that interest rates will continue to move lower over the next year. This likely reflects the RBA’s post-meeting messaging, which highlighted a finely balanced decision (6 to 3 vote in favour of holding rates) and a desire to wait for more inflation data, rather than a shift in the expected direction of rates.

Although the ‘time to buy a major household item’ index fell by 2.6%, this only partially unwinds the 7.5% gain recorded in June 2025. This is likely due to EOFY sales scaling back, and the RBA's decision to hold rates steady. Retailers can expect consumers to remain cautious in the near term following the EOFY sales period. In the meantime, retailers can focus on cost and inventory management while preparing for the next sales period, until the broader economic and trade outlook becomes clearer.

Source: Australian Bureau of Statistics

The most recent ABS retail sales data recorded a 0.2% increase (seasonally adjusted) in May 2025, representing a c. 3.5% or $1.2bn increase in sales from May 2024. Sales were 3.5% above May 2024.

Three out of the six sub-categories experienced growth across the month, led by:

• ‘clothing, footwear and personal accessory retailing’ up 2.9%

• ‘department stores’ up 2.6%

• ‘cafes, restaurants, and takeaway food services’ remaining unchanged

• ‘other retailing’ down 0.2%

• ‘household goods retailing’ remaining unchanged

• ‘food retailing’ down 0.4%

‘Clothing, footwear and personal accessory retailing’ led the growth at a 2.9% increase, reversing the 2.5% decline in April. Further, ‘department stores’ recorded a 2.6% increase, rebounding from the decline in April (-2.5%). The return to growth follows low April (-0.1%) sales, with the beginning of the mid-year sales period encouraging some shoppers to take advantage of early discounts and sales events. The increase was also supported by cooler than expected temperatures leading into winter, prompting higher consumer spending on winter apparel. These gains were partly offset by a 0.4% decline in food retailing, driven by reduced spending at liquor stores and supermarkets following a lull in seasonal festivities.

On a regional basis, all states aside from Tasmania (-0.1%) recorded small increases in retail volumes, with Western Australia experiencing the largest increase (+0.7%).

The ABS Household Spending Indicator (ABS HSI) increased 0.9% in May 2025 (seasonally adjusted). The month-on-month increase was driven by a 0.5% increase in non-discretionary spending, while discretionary spending increased by 1.1%, rebounding from the underwhelming March (-0.2%) and April (-0.3%) results. On an annual basis, non-discretionary spending was 5.0% above May 2024, while discretionary spending was 3.7% above May 2024.

Source: NAB Online Retail Sales Index

The NAB Online Retail Sales in May 2025 increased by 0.7%, following an increase of 1.1% in April 2025. Growth remained high in year-on-year terms, with seasonally adjusted sales increasing 15.4% between May 2024 and May 2025. Most categories showed growth in May, led by ‘fashion’ (+4.4%), ‘games and toys’ (+2.8%), ‘grocery and liquor’ (+2.0%). Growth in ‘grocery and liquor’ was led by spending in NSW and VIC, with VIC continuing to lead the major sales states for this category over the past year. NAB data estimates Australians spent $63.27 billion on online retailing, making up 14.3% of total retail spend.