Fears of growing debt and rising interest rates caused consumers to rein in Christmas spending despite growing incomes, the latest consumer survey has found.

According to the results of the Irish Intercontinental Bank (IIB) /ESRI consumer survey for December, the Budget boosted consumer sentiment in December as the indicator of overall sentiment rose to 89.8, up from 87.9 in November.

However, despite the improvement in overall sentiment, consumers' perception of their financial situation in the month of December - before Budget measures were implemented - deteriorated.

Rising debt levels and December's interest rate rise prompted a cautious approach to Christmas shopping, as consumers appeared willing to defer major purchases until the post-Christmas sales. The index of current economic conditions, which measures sentiment in the relevant month, fell to 92.8 in December from 95.2 in November.

However, the survey also suggests a positive reaction to the last Budget. In its strongest increase in three years, the index of consumers' expectations - which measures consumers' perceptions of their employment and income situation over the coming year - rose sharply in December to 87.7, up from 82.9 in November.

Commenting on the results, ESRI economist David Duffy said the improvement in overall sentiment represented greater optimism about the future in December compared to previous months.

"Once again the improvement in consumer sentiment in December is the result of a more positive perception of the future by consumers.

"The improvement in sentiment in December suggests Irish consumers believe Budget 2007 will have a bigger impact on household spending power than the ECB interest rate increase announced the day after Mr Cowen's Budget package," IIB's chief economist Austin Hughes said yesterday.

Mr Hughes qualified this by saying that consumers still felt worse off than last year, in spite of December's improvement.

"Because spending power has been squeezed by rising energy pries, higher borrowing costs and more general increases in the cost of living, consumers still remain less optimistic about their personal finances than they have been in recent years," he said.

He added that 2007 would see a "battle" between the effect of SSIAs and interest rate increases and that this would determine the strength of consumer sentiment during the year.