Australian Retail Sales Fall Most in Six Years as Lending Cools

By Jacob Greber

July 31 (Bloomberg) -- Australian retail sales fell by the most in six years, stoking speculation central bank Governor Glenn Stevens will be forced to cut 12-year high interest rates.

Sales declined 1 percent from May, the biggest drop since June 2002, the Bureau of Statistics said in Sydney today. Lending to consumers and businesses rose at the slowest annual pace last month in almost six years, according to a separate report by the Reserve Bank of Australia.

Consumers are cutting discretionary spending at department stores after being buffeted by record gasoline costs, rising food prices and Steven's decision to raise the benchmark interest rate to 7.25 percent in March, the fourth increase since August last year. Stevens said earlier this month there is a ``good chance'' the economy will slow enough to bring inflation back within his target range.

``The central bank has gone too far and should consider cutting interest rates,'' said Shane Oliver, chief economist at AMP Capital Investors in Sydney. ``I think they should cut rates by September. Inflation is yesterday's story.''

The two-year Australian government bond yield fell 3 basis points, or 0.03 percentage point, to 6.3 percent at 1:08 p.m. in Sydney from 6.33 percent before the reports were released. The Australian dollar dropped to 94.41 U.S. cents from 94.47.

Shares in retailer Harvey Norman Holdings Ltd. fell 1.6 percent and Woolworths Ltd. slipped 0.1 percent. Australia's benchmark S&P/ASX 200 stock index rose 0.6 percent.

Department Stores

Spending at department stores fell 5.2 percent in June, while clothing dropped 5 percent, today's report shows. Consumers also spent less on food and recreational goods.

Households may curb spending further in coming months amid evidence the nation's 17-year economic expansion is slowing. Gross domestic product grew at the slowest annual pace in almost two years in the first quarter.

Consumer confidence slumped in July to the lowest level in 16 years, businesses in June were the most pessimistic since 2001 and home-loan approvals fell in May by the most in eight years, reports showed this month.

There is ``pretty clear evidence'' consumers are cutting spending, Stevens said earlier this month.

Weaker domestic demand is being offset by a mining boom, driven by demand from China for Australia's coal and iron ore.

A separate today showed the nation's trade balance turned to a surplus of A$411 million ($389 million) in June as exports jumped.

`Abnormal Sales'

Harvey Norman, Australia's largest furniture and electronics retailer, said this week that sales growth slowed to 8.7 percent in the year through June from 16.5 percent in the previous 12 months as demand for furniture and household appliances eased.

Just Group Ltd., Australia's largest owner of clothing stores, also reported today that sales were ``disappointing'' in June. The drop was ``unforeseeable and abnormal, even in a soft consumer environment,'' Managing Director Jason Murray said in statement.

``Consumers are being assailed from all sides, with higher interest rates, surging fuel prices and other prices constraining budgets,'' economists including Bill Evans at Westpac Banking Corp. said in a note to investors.

Central bank policy makers raised borrowing costs in March, February, November and August in a bid to slow inflation that has accelerated to 4.5 percent. The bank aims to keep annual price gains between 2 percent and 3 percent.

Mortgage Repayments

The increases have added A$250 to monthly payments on an average A$250,000 home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes on mortgage payments in the March quarter, the most in the 22 years the institute has measured affordability.

Interest rates are ``exerting the appropriate degree of restraint'' on the economy, policy makers said in minutes of their July 1 meeting, when they left the key rate unchanged for a fourth month. They review rates again next week.

``It looks more likely now than it did a couple of months ago that this more moderate track for demand will continue,'' Stevens said on July 16. That will ``in due course begin to exert downward'' pressure on inflation, he said.

Investors have increased bets this month that the central bank will cut interest rates, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Traders expect Stevens will lower the benchmark rate by 58 basis points, or 0.58 percentage points, in the next 12 months. At the start of this month, they forecast 19 basis points of gains.

Retail sales, adjusted to remove inflation, fell 0.6 percent in the three months through June from the previous quarter. The median estimate of 21 economists surveyed by Bloomberg News was for no change.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net