By Jacob Greber
July 2 (Bloomberg) -- Australian retail sales rose in May at the fastest pace in six months, sending the currency higher on speculation the central bank will boost borrowing costs again this year.
Sales climbed 0.7 percent from April, when they fell a revised 0.1 percent, the Bureau of Statistics said in Sydney today. The increase beat the median estimate of 24 economists surveyed by Bloomberg News for a 0.1 percent gain.
Spending has increased on food, recreational goods, cosmetics and jewelry, suggesting households are weathering 12- year high interest rates and record gasoline prices. Tax cuts introduced yesterday that boost average incomes by A$20 ($19) a week may drive spending in coming months, increasing pressure on central bank Governor Glenn Stevens to cool the economy further.
``We're calling another rate hike this year, probably in November,'' said Matthew Johnson, a senior economist at ICAP Australia Ltd. in Sydney. ``If consumers can increase discretionary spending when fuel prices are high, then they will most probably spend the tax cuts.''
The Australian dollar climbed to 95.85 U.S. cents at 12:33 p.m. in Sydney from 95.47 cents before the figures were released. The two-year government bond yield rose 7 basis points, or 0.07 percentage point, to 6.93 percent.
Spending at recreational goods retailers gained 2.2 percent in May, while food sales increased 1 percent, the report showed.
Rate Increases
Australia's central bank has been trying to curb consumer spending, which accounts for about 60 percent of the economy, to cool inflation that has accelerated above its target range of between 2 percent and 3 percent.
Stevens and his board left the benchmark interest rate at 7.25 percent yesterday, saying the economy will moderate this year. The bank increased rates in March, February, November and August.
Last month, Stevens signaled that the bank is prepared to boost borrowing costs again if consumer and business spending rebounds.
Today's report suggests hiring by mining companies such as BHP Billiton Ltd., which is expanding to meet demand from China for iron ore and coal, is shoring up spending. The jobless rate was 4.3 percent in May, close to the lowest in more than three decades.
Export Boom
The central bank expects Australia's terms of trade, a measure of income from overseas sales, to surge 20 percent this year. The increase ``will add substantially to national income and ability to spend,'' Stevens said yesterday.
Also, some A$33 billion ($32 billion) in income-tax cuts over four years took effect from yesterday.
Households also appear to be weathering this year's surge in the price of crude oil, which hit a record $143.67 a barrel this week.
``So much for higher petrol prices affecting households discretionary spending,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``Today's data raises doubts over the Reserve Bank's apparent view that household spending was slowing abruptly.''
The surge in retail spending means an August increase in the central bank's cash rate target can't be ruled out, Dean added.
Conflicting Reports
Investors increased bets on the size of future increases in borrowing costs after today's report. Stevens will boost the benchmark rate by 25 basis points in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. Yesterday, they forecast 19 basis points of gains.
Still, some economic reports signal household spending will slow in coming months. Consumer confidence slumped to the lowest level in almost 16 years in June, and a separate release today showed home-building approvals fell 6.5 percent May, the fourth decline in the first five months of this year.
Just Group Ltd., Australia's largest specialty clothing retailer, cut earnings forecasts today because of a ``further weakening in consumer sentiment.''
``Anecdotes about spending remain very weak,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``For that reason, we think policy makers will view today's retail sales report with a large dose of salt.''
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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