Australia | Jul 02 2008
By Chris Shaw
Just when the Reserve Bank of Australia (RBA) was seeing increasing evidence its series of interest rate hikes was having the desired effect of bringing inflation under control by slowing down the Australian economy, a surprisingly strong retail sales figure for May has again generated some uncertainty.
Sales rose 0.7% against market expectations of something closer to a 0.1% increase, while the figures for April were also revised higher, from a deccline of 0.2% to a 0.1% gain. ANZ Bank senior economist Katie Dean suggests the figure means higher fuel prices are not limiting discretionary spending, as the increase this month was largely in the other retailing and recreational goods retailing sectors, which are far more discretionary than sectors such as food.
Dean suggests the data bring into question the RBA’s view household spending is slowing, especially as tax cuts that have come into effect this week mean data for July and August may also show signs of strength. Commonwealth Bank senior economist John Peters makes the point the stronger May outcome comes after a weaker few months, but sees the question as whether or not the RBA has been successful in denting demand enough to mean no further increases in rates are required?
His conclusion is it remains too early to tell, meaning other data in coming weeks will be of importance, particularly the CPI data due towards the end of this month. While Peters suggests other data will need to be weak to keep the RBA on hold, Westpac takes the view the better than expected data today doesn’t take away from the fact consumers are under pressure from the combination of higher interest rates and fuel costs and other cost increases, so it doesn’t see any change to policy from today’s numbers.
TD Securities senior strategist Joshua Williamson also doesn’t read too much into today’s numbers as the data in recent months have been affected by swings in food prices and by taking different measurements of the data it could be concluded discretionary expenditure actually fell for the month.
As well Williamson points out the June reading for consumer sentiment was down 6%, which implies expenditure growth will fall back to a weaker trajectory in coming months as trend retail sales growth continues to weaken. This leads him to suggest the RBA will be confident enough it is on the right track with its monetary policy settings to deliver a slowing in the economy, which will allow the central bank to move to an easing bias in coming months.