Shopping pullback another sign RBA likely to hold rates steady

Shoppers held back in June despite midyear sales as cost-of-living pressures continued to hit household budgets, giving the Reserve Bank board another reason to keep the official cash rate steady next week.

Retail turnover fell 0.8 per cent in June, Australian Bureau of Statistics figures showed, with falls in spending across all non-food industries.

Retail turnover fell in June, driven by a slump in department store spending as consumers tighten their belts.Credit: Natalie Boog

Department stores suffered the largest fall, of 5 per cent, and spending on clothing, footwear and personal accessories went backwards by 2.2 per cent.

Asia-Pacific economist for jobs website Indeed Callam Pickering said signs that the retail sector was teetering, combined with this week’s lower than expected inflation figures, should encourage the Reserve Bank board to leave interest rates at 4.1 per cent at next week’s meeting.

“Inflation is set to moderate considerably over the second half of the year, following global trends, and we believe that the RBA will be more than happy to leave rates unchanged to assess the impact that earlier rate hikes have had on domestic activity and inflation,” he said.

ABS head of retail statistics Ben Dorber said cost-of-living pressures were continuing to weigh on consumer spending.

“Retail turnover fell sharply in June due to weaker than usual spending on end-of-financial year sales,” he said.

“There was extra discounting and promotional activity in May, leading up to midyear sales events. This delivered a boost in turnover for retailers, but that proved to be temporary as consumers pulled back on spending in June.”

Food spending was mixed: turnover in cafes, restaurants and takeaway shops fell 0.3 per cent, while food retailing rose 0.1 per cent.

“Over the last 12 months, growth in food-related spending has mostly been driven by rising food prices,” Dorber said.

He noted this week’s consumer price data, which showed that inflation for food and non-alcoholic beverages rose by 1.6 per cent over the three months to the end of June.

“Consumers are responding to these price rises by changing to cheaper brands or by simply buying less,” he said, adding it would be important to look at next week’s retail sales volume data to see the full impact of inflation on sales.

Supermarket executives this week told a House of Representatives economics committee inquiry that cost-of-living pressures were changing consumers’ shopping patterns, forcing them to shop around for food staples such as bread, cheese and eggs in the hope of finding a bargain.

Pickering said that, on average, households were consuming fewer retail products than they were late last year as prices continued to climb.

“Over the June quarter, retail spending was 0.4 per cent higher than during the March quarter. Given prices have continued to rise, we expect that the volume of retail has now declined for three consecutive quarters. That hasn’t happened in 15 years.”

ANZ economist Madeline Dunk and ANZ head of Australian economics Adam Boyton said the fall in sales supported the case for the Reserve Bank to keep interest rates on hold.

“When considered alongside our soft ANZ-observed spending data, today’s 0.8 per cent [month on month] fall in retail sales paints a stark picture about how households are dealing with the current economic environment,” they said.

“Spending is slowing as household budgets are squeezed by rising mortgage payments and cost-of-living pressures.”

But Commonwealth Bank economists still expect the RBA to lift interest rates by a quarter of a percentage point on Tuesday, pointing to the tight labour market and lack of wages data since the Fair Work decision to raise minimum wages, but acknowledged it was a line-ball call.

CBA senior economist Belinda Allen said home prices were still rising, productivity was weak and the Australian cash rate remained significantly below that of other central banks.

“Overall, there is enough evidence to suggest the path of least regret for the RBA is to lift the cash rate by [0.25 percentage points] to 4.35 per cent in August,” she said.

“This should provide an offset to any lingering risks in the inflation and wages outlook.”

Westpac also believes a further rate rise is needed on August 1, while financial markets expect there is just a 10 per cent chance of an increase.

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