SYDNEY: Australian retail sales rose by more than expected in May with spending largely driven by discounts in the face of elevated borrowing costs.

Sales advanced 0.6% from the prior month, double the economists’ estimate of a 0.3% gain, according to data from the Australian Bureau of Statistics yesterday.

The outcome follows a 0.1% gain in April, and was the biggest increase in four months.

In response, yields on policy-sensitive three-year bonds rose three basis points to 4.17% as rate traders boosted the odds for an interest rate hike this year. Stocks pared gains.

Sales was driven “by watchful shoppers taking advantage of early end-of-the-financial year promotions and sales events,” said Robert Ewing, head of business statistics at ABS.

“Many retailers started end of the year sales early, offering larger discounts than usual and noted that shoppers remain price-sensitive in response to persistent cost-of-living pressures.”

From a year earlier, retail sales climbed 1.7%, still running well below the 4% to 5% pace seen in early 2023 as rate rises and other cost-of-living pressures weigh on consumer spending.

Retail sales can be an important consideration in policy decisions given consumption accounts for more than half of gross domestic product.

The Reserve Bank of Australia (RBA) has repeatedly highlighted that the outlook for household spending remains a key uncertainty with consumer sentiment in the doldrums for more than two years now.

Private consumption has been hit hard by the RBA’s 13 rate hikes between May 2022 and November 2023, and yet inflation remains a worry.

Figures last week showed a partial gauge of consumer prices rose by more than expected for a third straight month in May, prompting money markets to price in odds of a rate hike this year.

At the same time, the labour market remains tight, with unemployment hovering around 4%.

The RBA next meets on Aug 5 and 6, with some economists predicting the RBA may tighten policy further to take the benchmark rate to 4.6% - a level not seen since October 2011.

The board has placed a high bar to raising rates again, while saying that further tightening cannot be ruled out.

The consensus among economists so far is still that the RBA will hold rates at 4.35% this year, though some believe a hike in August cannot be ruled out if the second-quarter inflation report due on July 31 surprises on the upside.

Minutes of the RBA’s June meeting released on Tuesday showed an August rate hike remains in play, with the policy-setting board emphasising the need to remain “vigilant” to upside price risks.

 - Bloomberg