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Australian retail sales suffered a surprise fall in April as consumers cut spending on food and recreation in the face of surging living costs, but also perhaps lessening the need for a further increase in interest rates.
The Australian dollar slipped after yesterday's data showed sales dropped 0.2 per cent in April to A$20.07 billion ($24.9 billion), confounding forecasts of a 0.2 per cent increase. The Bureau of Statistics also revised down March's result to show a 0.2 per cent rise from the previous 0.5 per cent gain.
The data comes just a day before the Reserve Bank of Australia (RBA) holds its monthly policy meeting and should support its view that domestic demand will slow enough to restrain future inflation and avoid another hike in rates.
"Importantly for monetary policy, the data continues to suggest that demand has stepped back in the first quarter and into this quarter, easing the near-term pressure on interest rates," said Scott Haslem, chief economist at UBS.
Bill futures firmed as the market duly pared back the risk of a rise in the 7.25 per cent cash, while the Australian dollar dipped a quarter of a US cent to A$0.9530, near a two-week low.
The central bank has been counting on a significant slowdown in domestic demand to restrain core inflation, which accelerated to a 17-year high of 4.2 per cent last quarter.
But while consumption has clearly cooled, a private gauge of inflation out yesterday showed it has yet to make much impression on price pressures.
The TD Securities-Melbourne Institute's measure of inflation rose at an annual pace of 4.5 per cent in May, the highest in the five-year history of the series and well above the RBA's 2 to 3 per cent target band.
"Another solid monthly reading shows that inflation remains the most pressing issue facing Australian policy makers," said Joshua Williamson, a senior strategist at TD Securities.
That was why the RBA's board seriously considered raising rates in May, though in the end it decided to wait and see if past tightening did the trick.
The tightening has been major, with four hikes from the RBA since August and added increases in mortgage rates by banks as the global credit squeeze forced up funding costs.
That has been sorely felt by Australia's highly indebted households, already struggling with the rising cost of everything from food to fuel, health care and education. As a result, consumption looks to have slumped in the first quarter and is largely why analysts believe the economy grew by 0.3 per cent in the quarter, the smallest rise since late 2004.
The gross domestic product (GDP) report due tomorrow is expected to show spending on goods and services grew 2.9 per cent in the first quarter from a year earlier, a marked slowdown from the previous quarter's 3.9 per cent.
Government figures on inventories released yesterday showed a build-up in stocks only added a marginal 0.1 percentage points to growth last quarter, hardly enough to compensate for weakness in consumption, business investment and international trade.
"GDP is looking very soft for the first quarter and there's a real risk it might actually contract," said Stephen Roberts, a research director at Lehman Brothers.
"The RBA wanted to see a slowdown and they're getting it in spades," he added.
- REUTERS
