KEY POINTS:
Consumer spending fell unexpectedly in the June quarter, giving the clearest evidence yet that Reserve Bank interest rate increases are slowing the economy.
The New Zealand dollar fell almost 1c against the US currency as money markets factored in the diminishing likelihood that Reserve Bank Governor Alan Bollard will have to lift rates again this year.
This will bring relief for home owners with mortgages, who have had four consecutive rate rises this year.
Adjusted for inflation, retail sales fell 0.6 per cent in the three months to June, the first fall in the quarterly measure since December 2005.
Economists had expected a slight increase, especially after a record 3.7 per cent growth in the March quarter.
They said the latest figures showed consumers were getting the message from Dr Bollard.
Bank of New Zealand economist Craig Ebert said the figures had been choppy for some time.
"But it's hard to deny that they're weak, both in terms of the June month and quarter result."
The fall in seasonally adjusted June month sales, which was counter to market expectations of a slight gain, suggested a weak number for the September quarter as well.
"That's unless you get a big rebound in July and August, which looks fairly unlikely."
Coming hard on the heels of evidence that the housing market is beginning to soften, yesterday's figures would be pleasing to the Reserve Bank, said Mr Ebert.
"In many ways it's encouraging that consumers are starting to take some heat out of the demand side of the economy.
"It's only one of many things that need to cool off for the Reserve Bank to be completely sure it's winning the inflation battle, but it's reasonably high on the list."
UBS economist Robin Clements said the volatility of the figures aside, "the monthly trends suggest that momentum has definitely slipped and, in the context of a deteriorating consumer confidence, is consistent with [monetary] policy gaining traction".
The industries with the largest falls in volumes were appliance retailing, down 5.5 per cent, motor vehicle retailing, down 1.3 per cent, accommodation, down 6.5 per cent, and cafes and restaurants, down 3.2 per cent.
But spending on the basics rose - supermarket and grocery volumes were up 1.7 per cent and vehicle fuel was up 3.3 per cent.
Westpac economists said that as well as higher interest rates, an 8 per cent increase in petrol prices over the quarter had probably helped erode households' purchasing power.
They also said the strong New Zealand dollar had dented spending by overseas tourists and encouraged New Zealanders to travel and spend more overseas.
ASB Bank economist Daniel Wills said slowing spending on durable goods, particularly appliances, hardware and furniture, was consistent with signs of slowing momentum in the housing market.
The turmoil in global markets meant currency investors needed little encouragement to offload the New Zealand dollar, and they seized on the spending figures, sending the local unit sharply down.
From US73.93c immediately before the figures were released, it closed at US73.2c.
But Mr Ebert said there was a risk of overreaction to the figures.
While the drop probably ruled out prospects of further interest rate increases soon, there was also little chance of imminent cuts.
The labour market was still buoyant, consumer confidence was holding up and other recent spending indicators, such as credit card billings and electronic card transactions, had been quite strong.
"There's still an awful lot to suggest the economy is still relatively robust but is maybe just coming off the boil a bit," he said.
Mr Clements noted the Reserve Bank had said it was likely to need a sustained period of slower growth to alleviate inflation pressures.
"We may be on the verge of getting that, but we expect the official cash rate to stay high for a considerable time, barring a serious escalation of the recent global turmoil."
Citigroup economist Annette Beacher also said the spending figures did mean an interest rate cut was unlikely. The Reserve Bank was unlikely to revisit 2003, when "over-easing" led to a housing boom that could only now be tamed.
