An employee works in a specialty grocery store in Sydney, Australia, June 17, 2020. REUTERS/Loren Elliott/File Photo Purchase Licensing Rights , opens new tab

Item 1 of 2 An employee works in a specialty grocery store in Sydney, Australia, June 17, 2020. REUTERS/Loren Elliott/File Photo

Summary Sales up just 0.2% in May, fourth month of minimal growth

Food retail sales fall for first time this year

Investors now see 96% chance of rate cut next week

SYDNEY, July 2 (Reuters) – Australian retail sales barely grew for a fourth straight month in May as gains in clothing purchases were offset by a rare drop in food sales, bolstering the case for another cut in interest rates next week.

The result dashed hopes that lower borrowing costs and rising real incomes would revive household demand, suggesting the Reserve Bank of Australia will have to again downgrade consumption forecasts, in a blow to the economic outlook.

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Investors now see a 96% chance for the RBA to cut its cash rate of 3.85% by a quarter-point next Tuesday as economic growth stays weak and inflation risks have faded.

Retail sales rose 0.2% in May from April, when they were flat, Wednesday’s data from the Australian Bureau of Statistics (ABS) showed. That was short of market forecasts for an increase of 0.4% and marked the fourth month of sluggish spending.

The sales of A$37.3 billion ($24.5 billion) were up 3.3% on a year earlier for the slowest annual pace since last November.

The data follows a measure of Australian consumer sentiment for May that showed pessimists still outnumber optimists.

Given the weakness in consumption, ANZ brought forward its next rate cut call to July from August. That means all four big Australian banks are tipping a cut next Tuesday.

“While 75 bp of easing in a relatively short time runs a risk of igniting a little more demand than might be desirable, the recent softness in retail trade means that is likely to be seen as a lower risk than waiting too long for consumer demand to lift,” said Adam Boyton, head of Australian economics at ANZ.

The RBA has cut interest rates twice since February as cooling domestic inflation gave scope to counter rising global trade risks.

However, the economy barely grew in the first quarter as consumers stayed stubbornly frugal and government spending sputtered to a standstill.

tame inflation reading for May has also encouraged investors to lock in a quarter-point rate cut next Tuesday, which led to many economists bringing forward their rate cut call to July from August.

Swaps imply rates will keep falling to a floor of 2.85%, taking it under most estimates of neutral.

Wednesday’s report showed food retail sales fell 0.4% in this year’s first monthly drop, while spending in cafes and restaurants was flat. Spending on clothes grew 2.9% on winter buying, though that only followed a big drop the previous month.

The retail survey, covering 35% of household consumption, will be replaced after July by the Monthly Household Spending Indicator series, which is much broader in scope. The next MHSI report is due on Friday.

“While we continue to see conditions improving thanks to lagged impacts from the cuts since February, recent disappointing data points to further cuts from the RBA to deliver more to boost the economy,” said AMP economist My Bui.

“Our base case is for four more cuts in July, August, November and February.”

($1=A$1.5202)

Reporting by Stella Qiu and Wayne Cole; Editing by Edwina Gibbs and Clarence Fernandez

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