Australia retail spending picks up pace

SYDNEY, (Reuters) - Australian retail sales grew at their strongest pace in seven months in February, helping the local dollar edge up to fresh 29-year highs against the greenback, but money markets remained confident the central bank will keep rates unchanged next week.    

 Other data out on Tuesday showed growth in private sector loans rising, with business lending up 0.5 percent, the most in about two years.     

 Building approvals, however, indicated a still soft housing sector, although the massive floods in Queensland earlier in the year have disrupted approval processing so much that the true trend is not yet clear.    

 Overall, it was a mixed bag of data that did not change market expectations for the Reserve Bank of Australia (RBA) to remain sidelined on rates for a while longer.

Interbank futures were little changed in the wake of the data, implying only a moderate risk of a rate move at all this year. A hike to 5 percent is not fully priced in until April/May next year.

The Australian dollar, already flying high, edged up to a fresh 29-year peak of $1.0348 following the data, just surpassing the previous top of $1.0338 set a day earlier.

Retail sales rose 0.5 percent in February, topping forecasts of a 0.4 percent increase and the largest gain since July 2010.     

 Sales in Queensland grew 2.3 percent as rebuilding in flood-ravaged areas gained momentum, while sales of household goods nationally posted its biggest gain in 10 months.    

 Annual growth in sales jumped to 3.6 percent, from a pedestrian 1.6 percent in the previous month.

 “The combination of higher credit and higher retail sales is telling me that the consumer is feeling a bit more confident in spending and borrowing,” said Annette Beacher, head of Asia Pacific research at TD Securities.

“It’s certainly encouraging because the consumer has been remarkably absent from overall activity  in the last couple of months.”    

 Yet, it is this consumer restraint the RBA is trying to encourage, so as to offset the inflationary pressures from an unprecedented investment boom in the mining sector.    

 Retail sales account for around 23 percent of Australia’s gross domestic product and the sector is the second-biggest employer after the health industry, with nearly 11 percent of all jobs.    

 Retailers have been complaining of poor sales for months as consumer chose to save more, forcing deeper price discounting and helping restrain inflation.    

 “The RBA has highlighted it is extremely comfortable where they are at the moment and they have highlighted that it is the consumer that will tip them over. We need to see inflation pick up first,” Beacher added.    

 The central bank has led the developed world by hiking 175 basis points since late 2009, a pre-emptive policy that has worked well to tame inflation and curb consumer demand.    

 Those rate hikes and the end of government incentives have weighed on the housing market and latest data seem to confirm that trend.    

 Housing credit growth dipped slightly and building approvals fell 7.4 percent, following a revised 11.6 percent slide in January. Approvals in Queensland were down 11.8 percent, while those in Victoria dropped 23.1 percent.    

 “We always thought the weather would have hampered the approvals process in February as well as January, so the outcomeis not really as bad as the headline numbers might suggest,” said Brian Redican, senior economist at Macquarie Bank.