A leading consumer confidence reading surged 5.6% in January from 113.8 in December to 120.1 in January as consumers became more bullish on the state of the job market and largely overlooked the threat of rising interest rates.

The Westpac-Melbourne Institute Index of Consumer Sentiment had fallen from highs in November and December on the back of consecutive rate rises from the RBA and today’s reading may be a contributing factor in another rise next month.

“This is a very strong result,” Westpac’s Chief Economist, Bill Evans, commented. “The Index is seasonally adjusted and therefore takes account of traditional January optimism.

“Nevertheless it is still above its level of last September prior to the Reserve Bank’s record three consecutive rate increases over the three months from October to December.

“In other convincing evidence that households appear to have comfortably absorbed the higher interest rates we note that the confidence of those respondents who currently hold a mortgage has reached its highest level since 1994 when we first collected data using categories defined by home ownership. These categories of the Index are not seasonally adjusted but suffice to note that the rise in the confidence of those respondents with a mortgage was up 16.7% in January compared to the average rise in January of 8.6%.”

Strong jobs data, with the unemployment rate now likely to have peaked, was considered by analysts as the major reason for the sentiment improvement, with consumers reporting higher job security.

Assessments of “Family finances compared to a year ago” increased by 5.2%; expectations about family finances “over the next 12 months” increased by 10.5%. Expectations for “Economic conditions over the next 12 months” rose by 6.8%, although expectations for “economic conditions over the next 5 years” fell by 2.1%.

“The evidence from this survey; the labour market; and recent trends in retail sales indicates that the Bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy,” Mr Evans advised. “A recent speech from an RBA official indicated that such a level for their overnight cash rate might be expected to be around 4.5% compared to the current 3.75%.

“Accordingly we expect to see another rate hike of 0.25% to be announced by the Bank on February 2 with the likelihood of another two increases of 0.25% each by June.”