Euro debt crisis, stay-at-home shoppers raise pressure on Reserve

Another interest rate cut may bring some relief to struggling retailers. Photo: Tamara Voninski

ECONOMISTS say disappointing retail sales figures have increased the likelihood of a further interest rate cut, which futures markets consider an all-but-certain case, as Europe's debt crisis continues to weigh heavily on the minds of investors.

Bureau of Statistics figures released yesterday show the retail sector continued to struggle in the lead-up to Christmas, with heavy pre-holiday discounting failing to open shoppers' wallets.

Retail turnover was a relatively unchanged $20.9 billion in November, seasonally adjusted, after a 0.2 per cent rise the previous month.

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Despite Friday's positive news on US unemployment, where the unemployment rate fell to a near three-year low of 8.5 per cent, news of sluggish retail sales in Australia was enough to spook already-jittery investors, who reacted negatively to the news, pushing the sharemarket lower.

The benchmark S&P/ASX 200 Index lost 3.1 points to 4105.5 points, while the broader All Ordinaries lost 3 points to 4161.5.

Economists said the weak retail sales would add to the much larger concerns about Europe, where the threat of a fragmenting euro zone remains high.

''In August the RBA board was considering rate rises as a stronger possibility than cuts and that turned reasonably quickly because of the deterioration in European events and the likely negative effect on consumer and business confidence not only here, but also in the rest of the world,'' Commonwealth Bank senior economist Michael Workman said. ''That background is still present.''

China is another factor that could encourage rate cuts, according to the manager of the world's biggest bond fund, Pacific Investment Management Co.

''We expect the global environment to be less supportive, with lower than consensus growth forecasts for China in particular,'' Robert Mead, Pimco's head of portfolio management in Australia, wrote. ''We think the RBA will need to ease further in 2012.''

Yesterday the futures market was predicting an official cash rate of 4.03 per cent by mid-February, while the Reserve Bank's official cash rate is currently 4.25 per cent. That means it has priced in all but 3 basis points of a 25 basis point rate cut. Three other 0.25 per cent cuts are priced in by the end of the year.

Mr Workman said weak retail sales meant inflation looked likely to remain near 2.5 per cent through the year.

''The weakness in the retail trade implies that the discounting will continue, which therefore puts some downward pressure on those retail-related prices in the CPI,'' he said.

Even the good news from the US needed to be treated with some caution, according to Paul Bloxham, the chief economist at HSBC Australia.

''The unemployment rate continues to fall, but part of the reason why the unemployment rate has fallen as much as it has in the last few months is that the participation rate has come down, which means there's been people exiting the labour market because they just can't find jobs,'' he said.

Source: http://www.brisbanetimes.com.au/business/euro-debt-crisis-stayathome-shoppers-raise-pressure-on-reserve-20120109-1prrw.html

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