Spending up so interest rates go up

Rate rise on horizon as spending holds up
Friday December 15, 2006
By Christopher Niesche ?

Retail spending increased again in October - particularly on cars - strengthening the likelihood that Reserve Bank Governor Alan Bollard will raise interest rates next year.

Statistics New Zealand said yesterday that retail sales grew a seasonally adjusted 0.3 per cent in October. Economists had been expecting a rise of 0.1 per cent. Core retail sales - which excludes motor vehicles and fuel retailing - grew 0.2 per cent.

"Spending momentum appears to be gaining over the past few months which, together with signs of an upturn in the housing market, will be unlikely to provide the Reserve Bank with any comfort," said ANZ Bank.

October's retail sales "will be stronger than what the Reserve Bank was expecting ... and the door to a hike in January has widened".

Bollard noted in last month's Monetary Policy Statement that household spending was showing "surprising resilience" and warned another rate hike might be needed to clamp down on inflation.

The governor will decide next month whether to hike the official cash rate above its present 7.25 per cent level.

Of the 24 industries measured by Statistics New Zealand, half recorded increases. The largest rise in sales was in motor vehicle retailing, which rose a seasonally adjusted 4 per cent, bouncing back from the 1.4 per cent fall in September.

"The sales trend for motor vehicle retailing appears to have reached a turning point, after a period of decline that began in March 2005," Statistics NZ said. But it added that the data needed to be treated with caution.

UBS economist Robin Clements said that while October's retail sales growth was not in itself particularly strong, "it failed to unwind the strong growth posted for September" when retail sales grew 1.1 per cent. Deutsche Bank chief economist Darren Gibbs said "the consumer clearly remains alive and well.

"The strength seen in recent months is fully consistent with the strong rebound seen in consumer confidence (which extended further in late November) and with the strong growth in household income that continues to be reported by the Quarterly Employment Survey and implied by monthly tax collections."

ANZ said the outlook for retail spending remained strong thanks to the low unemployment rate.

"Consumers will continue spending while they have jobs," a spokesman said. "To date, households have been sheltered from the economic slowdown as a result of sustained labour demand and it is only when this support ceases will consumers start to shut their wallets.

"Expect consumer spending to remain robust for some time."