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Australians Spending Freely, Lock-In Rate Rise

Australian retail sales easily outpaced expectations in September, setting the seal on a very strong quarter for consumption and adding to an already compelling case for a further rise in
interest rates.

Thursday's government data showed sales rose 0.8 percent in September, when analysts had looked for a 0.5 percent gain. For the three months to September sales climbed 1.9 percent to A$56.7 billion (US$53 billion) in inflation-adjusted dollars, again topping forecasts of a 1.6 percent jump.

That strength underpinned the Australian dollar near 23-year highs, while bill futures implied a near-100 percent chance the Reserve Bank of Australia (RBA) would lift rates to an 11-year peak of 6.75 percent next week.

"Retail sales are very, very strong and it reinforces the reasons why the Reserve Bank will almost certainly raise interest rates," said Stephen Roberts, research director at Lehman's Grange Securities. "Spending in the domestic economy is very strong at a time when capacity is very scarce."

The RBA holds its next policy meeting on Nov. 6 and many analysts had already believed it had little choice but to tighten given that core inflation has accelerated to the very top of its 2 to 3 percent comfort zone.

Now with spending travelling so fast, the real question was whether a second or third move might be needed.

"There's certainly a view that one is not going to be enough," said Stephen Walters, chief economist at JPMorgan. "On our forecasts we've got inflation above the RBA's target range in coming quarters so they'll need to do more."

Body Blow

A hike next Wednesday would come just a couple of weeks before a national election and be a body blow to the government which is struggling badly in the polls. Rising mortgage rates are a sensitive topic in a country where 70 percent of households own their homes and debt is at record levels.

It would also be the fifth hike since May last year, yet all this tightening has not done much to slow the economy. In large part that is because Australia, as a major commodity exporter, has benefited hugely from the rise of China and India and their insatiable appetite for resources.

The resulting windfall to national income has boosted business investment and helped drive the jobless rate to 33-year lows of 4.2 percent, giving consumers both the means and confidence to keep spending.

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

Thus the brisk pace of sales in the third quarter augured well for economic growth as a whole.

"Growth is looking very solid for the third quarter, easily 4 percent plus, and that just underlines all the reasons why the RBA should hike with some urgency," said Brian Redican, a senior economist at Macquarie Bank.

The economy sped along at a 4.3 percent annual growth rate in the second quarter of this year and a further pick-up was expected for the third quarter.

"Just as important is that sales kept up their momentum in September," added Redican. "That means the fourth quarter also got off to a strong start."

Retailers were certainly feeling optimistic.

On Wednesday, electrical goods and furniture retailer Harvey Norman Holdings reported sales growth of close to 12 percent and forecast a 25-35 percent rise in net profit for the six months to December.

Still, much of this consumer demand has been met by a flood of imports, keeping the country's trade balance in the red despite massive increases in the price of many of its commodity exports like coal and iron ore.

Figures out on Thursday showed Australia's trade deficit unexpectedly widened in September to A$1.86 billion, the 66th straight month of shortfalls. Imports dipped 3 percent from record highs, but exports fell an even larger 4 percent as oil and gas revenues fell.