Interest rates cut by 1pc, retail sales bounce

Posted by Daniel Palmer on 2nd December 2008

Retail sales jumped in the month of October, increasing by 0.7 per cent – which was well above expectations. The ABS data came out hours before the Reserve Bank of Australia decided to cut rates by 100 basis points, reducing the cash rate to just 4.25%.

“The Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicate that a significant moderation in demand and activity has been occurring,” RBA Chairman Glenn Stevens advised. “With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term. With that outlook, and with capacity pressures now easing, it is likely that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise have been the case.”

The cut in the cash rate represents the fourth straight monthly easing in monetary policy after interest rates reached a peak of 7.25% earlier in the year.

Some positive news was seen with the better than expected retail figures, with sales rising by 0.7 per cent – making up for some of the one per cent decline seen in September. The overall growth in trend figures was a more restrained 0.2%, however.

Food retailing continued its positive trend growth (+0.6) but restaurants, cafés and takeaway food services saw the negative trend continue for the twelfth straight month (-0.6). The -0.6 drop in trend figures was the equal worst monthly drop over the past year and is perhaps symbolic of a shift toward more consumers staying at home instead of eating out. Supermarkets have proven beneficiaries of this trend with their sales continuing to head upwards.

Cafés, restaurants and takeaway outlets have faced their most challenging year in over a decade, with the trend figure falling by 4% over the past twelve months, representing a sharp contrast to the 5% increase for food retailers.

“The real test of this interest rate cut on consumer confidence will be more obvious during the January/February sale period when there’s not the emotion that buoys Christmas spending,” Australian National Retailers Association CEO, Margy Osmond said. “Food retailing continues to perform well, mainly because people seem to be forsaking restaurants for a good home cooked meal.”