Australia’s retail sales decline as rising rates take toll

SYDNEY – Australian retail sales unexpectedly fell in June, suggesting consumers are hunkering down in response to the Reserve Bank’s 12 interest-rate increases in 15 months.

Sales declined 0.8 per cent from a month earlier, compared with estimates for a flat result, and erased all of their gains in May, Australian Bureau of Statistics (ABS) data showed on Friday. The result was driven by department stores and clothing and footwear, the bureau said.

“There was extra discounting and promotional activity in May, leading up to mid-year sales events. This delivered a boost in turnover for retailers, but that proved to be temporary as consumers pulled back on spending in June,” said Mr Ben Dorber, head of retail statistics at the ABS.

“This comes as cost-of-living pressures continued to weigh on consumer spending…” 

The reading suggests consumers are beginning to cut back in the face of rising borrowing costs, in line with the central bank’s expectations as it tries to slow inflation.

The policy-sensitive three-year government bond yield pared gains to trade at 3.87 per cent, down from as high as 3.92 per cent.

The RBA left the cash rate at 4.1 per cent earlier in July to assess the impact of its tightening cycle that began in May 2022.

A weaker inflation reading this week boosted expectations that the RBA will extend the pause on Tuesday, and today’s data only adds to that case.

Retail sales are an important factor in rate decisions given that consumption accounts for roughly 60 per cent of gross domestic product.

“The loss of momentum in consumer spending will weigh heavily on upcoming RBA decisions,” said Mr Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.  

“After the promising CPI print earlier this week, we expect rates will be on hold in August.”

Friday’s report chimes with downbeat consumer sentiment, as households are being squeezed between higher rates and still-elevated inflation.

In a further headwind, a large number of mortgages that were fixed for three years at record low rates during the Covid-19 pandemic are being switched to higher floating rates, with the majority due in September. BLOOMBERG