Households have given this month’s interest rate cut the thumbs up with new data showing consumer sentiment jumping seven per cent.

Confidence among mortgage holders surged 10.8 per cent compared to a more modest 2.4 per cent rise among people who own their own home, the Westpac-Melbourne Institute consumer sentiment survey for September shows.

“This type of result comes as no surprise,” Westpac’s chief economist Bill Evans said.

“It is a direct response to the decision by the Reserve Bank to cut their overnight cash rate by 0.25 per cent and the swift response by the banks to reduce their variable mortgage rates by a similar amount.”

The central bank’s cut was the first in nearly seven years and followed 12 consecutive rate increases since May 2001.

It is the second month in a row consumer sentiment has shown a marked improvement, having earlier this year slumped to its lowest level since January 1992 when the economy was emerging from recession.

The combined 16.7 per cent August/September increase was the third largest two-month increase in the past 10 years and the sixth largest since the survey began in the mid-1970s.

Sentiment was buoyed last month by an eight per cent drop in petrol prices.

“However, despite this fortuitous run of positive news the index is 7.8 per cent below the 100 level indicating that pessimists still significantly outnumber optimists,” Mr Evans said.

This is the eighth consecutive month where pessimists have held the upper hand, and for longer than two previous economic slowdowns in 1995 and 2001.

“However, it pales in comparison with the recession years of 1989-1993 when we had 57 consecutive months where pessimists dominated.”

Mr Evans expects the RBA will cut its key rate by a further quarter of a percentage point at its next board meeting on October 7.

“The last two months have seen a sharp recovery in confidence but it is still at very poor levels,” he said.

“We expect that rates will need to come down further after October to provide some meaningful relief to financial conditions.”

AAP