Australian Rate Gains Signal Challenge for Retailers

Jan. 28 (Bloomberg) -- Further Australian interest rate gains, which investors expect as early as next week, will prompt consumers to cut spending, the head of Australia’s biggest retailer Woolworths Ltd. said.

“Interest rate rises are not good for consumers full stop,” Chief Executive Officer Michael Luscombe, 56, said in a interview in Sydney yesterday after a report showed consumer prices rose more than some economists forecast. “I think 2010 is going to be a challenging year.”

Luscombe’s comments underscore the downside for retailers of an economic recovery that prompted Reserve Bank Governor Glenn Stevens to raise borrowing costs in December for an unprecedented third month. Concern about inflation, which the central bank aims to keep between 2 percent and 3 percent on average, is increasing pressure on Stevens to keep raising rates.

Woolworths, which benefited early last year as Prime Minister Kevin Rudd’s government distributed more than A$20 billion ($18 billion) in cash to households, yesterday posted the slowest sales growth in a Christmas quarter since 1993. Consumer spending accounts for more than half of Australia’s economy.

“Like all retailers we harbored a secret hope that a miracle might happen and people might find they didn’t spend all their stimulus -- but they clearly had,” Luscombe said.

Woolworths shares fell 2.7 percent to A$26.09 at 1:06 p.m. in Sydney. The S&P/ASX 200 consumer staple index, which tracks retailers in the Australian benchmark, fell 1.6 percent.

Revenue Falls

Revenue at Woolworths’ general merchandise division fell last quarter for the first time in at least seven years as demand slowed at its Big W discount stores and Dick Smith Electronics outlets, the company said yesterday.

Traders are betting there is a 72 percent chance of a quarter-point increase in Australia’s overnight cash rate target to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 11:13 a.m. Prior to yesterday’s report, the chances of a move were 56 percent.

“Inflation is probably not low enough for the Reserve Bank to pause in February,” said Paul Brennan, an economist at Citigroup Inc. in Sydney. “The medium-term inflation outlook will increasingly be shaped by high commodity prices, signs of inflation pick-up in Asia and the recovery in the domestic economy.”

Core Inflation

The central bank’s so-called weighted-median gauge of inflation advanced 0.7 percent in the fourth quarter for an annual increase of 3.6 percent. Economists forecast gains of 0.6 percent and 3.5 percent respectively. The consumer price index rose an annual 2.1 percent.

“Discretionary spending levels will continue to be influenced by macro-economic factors,” Luscombe said.

Policy makers meet next week for the first time since Dec. 1 as signs mount of a recovery in Australia’s economy.

While inflation may “moderate in the near term,” it probably won’t slow “as far as thought likely six months ago,” Governor Stevens said last month, after boosting the benchmark rate to 3.75 percent. The consumer price index “will probably rise somewhat” this year, he said.

Employers added 135,700 jobs in the four months through December, the biggest four-month gain since 2006, pushing down the jobless rate to an eight-month low of 5.5 percent, a report showed Jan. 14. Consumer confidence jumped in January by the most in six months, a survey by Westpac Banking Corp. showed last week.

‘Weather Eye’

The creation of jobs is “one half of the equation, the other half is keeping a very careful weather eye on inflation and making sure our economic policy is balanced,” Rudd told 5AA Radio in Adelaide yesterday. His government is due to face an election this year.

The International Monetary Fund said this week that Australia’s gross domestic product will rise 2.5 percent this year and 3 percent in 2011. In October, it forecast 2 percent growth in 2010.

Stevens’s concern that inflation may strengthen more than forecast last year contrasts with remarks from policy makers in other countries. The European Central Bank, which this month kept its benchmark rate at a record low of 1 percent, said Jan. 21 that inflation is “expected to remain moderate,” and Federal Reserve officials said last month that inflation will “remain subdued for some time.”

New Zealand central bank Governor Alan Bollard said today the bank will keep its benchmark lending rate at a record-low 2.5 percent until the middle of this year because inflation is likely to remain within its target range until at least 2012.

Australia “is going into an upswing in 2010 from a higher starting point for inflation than you would probably like, and with less spare capacity than previously thought,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “It all points to a quarter-percentage point move next week.”