Australians Return to Shop, Heighten Rate Risk

Australian retail sales rebounded at the fastest pace in two years in June as spending recovered after two weak months, making a rise in interest rates next week almost a certainty.

The Australian dollar inched up while short bonds pared gains after government data showed sales rose 1.4% in June to A$19.18 billion (US$16.39 billion).

That topped analysts forecasts for a robust 1.0% gain with a bout of cold weather prompting shoppers to buy seasonal clothing. Consumption for the whole second quarter was soft with sales falling in real terms, but analysts said a fall was likely after a spending spree in the first quarter.

"It looks like growth has resumed in June again, with a pretty solid rise in retail sales," said David De Garis, senior economist at National Australia Bank. "It is a little bit more evidence that the economy has remained strong through the middle of the year, so barring exceptional movements in equity prices the Reserve Bank is on track to hike rates next week."

Other government data showed Australia's trade deficit widened in June as imports outpaced exports.

The strong data sets the scene for an imminent rate hike by the Reserve Bank of Australia (RBA). Financial markets are pricing in nearly an 80% chance the central bank will raise its key cash rate by 25 basis points to a decade high of 6.50% when its monetary policy board meets on Aug. 7.

Rates Up

The central bank raised rates three times last year to curb inflation, but the strength of the economy, an unemployment rate at 33-year lows and a lack of spare capacity are likely to see it tighten again as further insurance against price pressures.

Underlying inflation rose a rapid 0.9% in the June quarter, suggesting annual inflation was heading back toward the top of the RBA's 2% to 3% target band.

Retail sales account for around 23% of Australia's gross domestic product (GDP) and the sector is the biggest single employer with about 15% of all jobs.

The rise in retail sales in June was driven by a 5.6% jump in clothing and soft goods and a 1.4% increase in hospitality and services, while household goods sales rose 1.3%. It comes after May retail sales were revised down.

"The recovery in June will reassure policy makers that the softness in the previous two months was just a hiccup and not something more worrying, said Brian Redican, senior economist at Macquarie Bank. "Other sectors of the economy are all firing, so the RBA is still absolutely on for a rate hike next week."

Separate figures showed Australia's trade deficit widened to A$1.75 billion in June, compared with analysts' forecasts of a A$1.2 billion deficit.

Australia's Bureau of Statistics said bad weather conditions on the east coast of Australia in June hampered export volumes of some commodities.

The soft quarter for retail sales, along with downward revisions in the April and May trade balances could lead to modest GDP growth in the second quarter, analysts said.

"Back of the envelope, I now expect that net exports will subtract 0.1 percentage points from the second-quarter GDP," said Matthew Johnson, senior economist at ICAP. "Given that consumption is also likely to be anaemic, it's shaping up to be a modest second quarter."