Australian retail sales surprisingly fell in March as households faced the prospect of higher borrowing costs for longer. The currency declined.

Sales slid 0.4% from the prior month compared with an estimated 0.2% gain, Australian Bureau of Statistics data showed Tuesday. The outcome follows a downwardly revised 0.2% increase in February.

The Australian dollar fell 0.2% while the policy-sensitive three-year government bond yield extended declines. Money markets are now seeing a 40% chance of an interest-rate rate hike in November, down from odds of almost 60% on Monday.

The report comes a week after hotter-than-expected inflation in the first three months of 2024 prompted traders to reverse bets from a rate cut to a hike, while economists pushed back their forecasts for the Reserve Bank’s first cut. The median expectation is now for easing to begin in November.

Commonwealth Bank of Australia’s Gareth Aird said in a research note Tuesday he now expects “a more elongated and conservative monetary easing cycle.”

The RBA next meets on May 6-7 and is likely to leave its key rate at a 12-year high of 4.35%, while also releasing a quarterly update of economic forecasts. Some economists expect the board to reinstate a tightening bias given the latest employment data for March showed the labour market remains tight.

Retail sales can be an important consideration in policy decisions given consumption accounts for more than half of gross domestic product. The RBA has repeatedly highlighted that the outlook for household spending remains a key uncertainty.

“Consumers pulled back on retail spending in March as cost of living pressures remained high,” said Ben Dorber, ABS head of retail statistics. “Outside of the pandemic period and introduction of the GST, this is the weakest growth on record when comparing turnover to the same time in the previous year.”

Governor Michele Bullock is hoping to engineer a soft landing in the economy, having lifted borrowing costs by 4.25 percentage points between May 2022 and November 2023. The resilience of households to higher borrowing costs is critical to her optimism.

From a year earlier, retail sales climbed 0.8%, running well below the 4-5% pace seen in early 2023 as rate rises and other cost-of-living pressures weigh on household spending.

Thursday’s retail data also showed:

• Turnover fell in all industries except for food retailing, which climbed 0.9%.
• The largest falls were recorded in clothing, footwear and personal accessory retailing, down 4.3%, and department stores, 1.6% lower.
•  “The Taylor Swift-inspired boost in turnover for fashion and accessory retailers last month has proved to be temporary with an instant reversal this month,” ABS’ Dorber said.

  - Bloomberg