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Australian Shoppers Cut Back, Easing Rate Risk

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 Monday's data showed sales dropped 0.2 percent in April to A$20.07 billion (US$19.1 billion), confounding forecasts for a 0.2 percent increase. The Bureau of Statistics also revised down March's result to show a 0.2 percent rise from the previous 0.5 percent 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. "We continue to look for the RBA to remain on hold tomorrow, and the rest of this year," he added.

Bill futures firmed as the market duly pared back the risk of a rise in the 7.25 percent cash, while the Australian dollar dipped a quarter of a U.S. cent to $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 percent last quarter.

But while consumption has clearly cooled, a private gauge of inflation out on Monday 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 percent in May, the highest in the five-year history of the series and well above the RBA's 2 to 3 percent target band.

A Pressing Problem

"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 commercial 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 of the year and is largely why analysts believe the economy grew by only 0.3 percent in the quarter, the smallest increase since late 2004.

The gross domestic product (GDP) report is due on Wednesday and is expected to show that spending on all goods and services grew 2.9 percent in the first quarter from a year earlier, a marked slowdown from the previous quarter's 3.9 percent pace.

Government figures on inventories released on Monday 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.