AUSTRALIAN retail sales suffered their biggest fall this year in June as rising borrowing costs and high prices sapped consumer spending power, data showed on Friday (Jul 28), suggesting less need for another hike in interest rates.

There was also promising news on inflation as producer prices rose at their slowest pace since early 2021 in the second quarter, fuelling hopes consumer prices will continue to cool.

As a result, investors are now more confident the Reserve Bank of Australia (RBA) board will keep cash rates at 4.1 per cent for a second month when it meets on Aug 1.

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

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

Markets imply only a 20 per cent chance of a hike to 4.35 per cent, while the expected peak for rates has declined to 4.28 per cent from 4.45 per cent at the start of the week.

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Rates have climbed by 400 basis points since May last year and added hundreds of dollars to monthly mortgage repayments. Consumer spending was resilient at first, thanks in part to savings amassed during the pandemic, but now looks to be buckling.

Figures from the Australian Bureau of Statistics (ABS) showed retail sales slid 0.8 per cent in June from May, the largest drop since December. That reversed all of May’s 0.8 per cent gain and was well short of analyst forecasts for a flat outcome.

Annual growth in sales slowed sharply to 2.3 per cent, almost half of May’s pace and a world away from post-lockdown boom levels of 19 per cent seen in the middle of last year.

“There was extra discounting and promotional activity in May, leading up to mid-year sales events,” said Ben Dorber, ABS head of retail statistics. “That proved to be temporary as consumers pulled back on spending in June.”

The retreat in online sales was evident in data from NAB which showed a 4.1 per cent drop in June, with big falls in takeaway food, recreational goods, homewares and appliances.

The weakness looks to have lingered as ANZ reported spending on its own cards slid 10 per cent in the first three weeks of July, taking it below its 2022 and 2020 levels despite high inflation and strong population growth.

That was one reason analysts at ANZ recently abandoned their forecast of two more rate hikes and switched to an extended pause for policy. REUTERS