Australia retail sales subdued, rates seen steady

SYDNEY: Australian retail sales rose only modestly in June while approvals to build new homes slipped for a third straight month, reflecting the drag of past rate hikes and adding to the case for steady monetary policy in the near term.

The Australian dollar eased as Tuesday's data only reinforced expectations the Reserve Bank of Australia (RBA) would keep its key cash rate steady at 4.5% at its monthly policy meeting on Tuesday. An announcement is due at 0430 GMT.

"The good news for homeowners and existing borrowers is that that RBA policy will remain on hold for the next three months at least, and probably well into 2011," said Rory Robertson, interest rate strategist at Macquarie.

Markets are pricing in virtually no chance of a rise in the RBA's 4.5% cash rate on Tuesday, and only around a one-in-four probability of a hike to 4.75% by Christmas . The policy announcement is due at 0430 GMT.

The RBA has far outpaced the developed world by lifting the cash rate 150 basis points since October and underlying inflation has duly moderated to a three-year low of 2.7%, within the central bank's target range of 2-3%.

Yet many analysts suspect another hike could be needed this year as surging export earnings, strong business investment and falling unemployment all put upward pressure on prices.

A Reuters poll of 20 analysts taken last week found 18 expected at least one more hike by year-end, while the majority saw rates at 5.25% by mid-2011.

"The RBA is very concerned about the medium-term inflation outlook, and we think we'll probably see at least one more rate hike this year," said Helen Kevans, an economist at JPMorgan. "I think that will be talked about in today's RBA commentary."

Learning to save

The RBA has noted that consumers have been more cautious than in previous recoveries, with memories of the global financial crisis leading them to save more and borrow less.

Retail sales rose a modest 0.2% in June, from May when they were also up 0.2%. That was under forecasts for a 0.3% rise and left sales 1.9% up on June last year.

Analysts suspected some of the softness in nominal sales could be due to discounting, which has been wider than usual in food, clothes and consumer electronics.

Indeed, real sales for the three months to June were up a firmer 0.8% in inflation-adjusted dollars to A$57.9 billion (RM166.6 billion). That suggested sales made a useful contribution of perhaps 0.2%age points to economic growth in the second quarter, after a subdued first quarter.

Retail sales account for around 23% of Australia's economy and the sector is the second-biggest employer with about 11% of all jobs, behind the health sector.

"The rise in real sales is a better starting point for GDP than we expected," said Annette Beacher, a senior strategist at TD Securities. "It means growth could be around 1% for the quarter, which would be a solid number."

Gross domestic product grew a moderate 0.5% in the first quarter, driven largely by government spending.

Growth should also have been supported by rising home construction last quarter, though the outlook for next year is not so bright.

Approvals to build new homes surprised by falling 3.3% in June, when analysts had looked for a 2% rise. The total level of approvals was revised up, but it still marked the third month of declines.

"It was another disappointing fall in residential building approvals which has clearly lost the prior momentum," said George Tharenou, an economist at UBS. "We continue to expect that the RBA will hold rates steady later today." -- Reuters