By Jacob Greber Feb. 4 (Bloomberg) -- Australian retail sales unexpectedly fell in December for the first time in five months as households, reeling from a record three interest-rate increases, cut spending at department stores and supermarkets. Sales declined 0.7 percent from November, when they gained a revised 1.5 percent, the Bureau of Statistics said in Sydney today. The median forecast of 20 economists surveyed by Bloomberg News was for a 0.2 percent gain. The drop in spending at companies such as Woolworths Ltd., Australia’s biggest retailer, follows the central bank’s three interest-rate increases from October to December, which boosted the cost of monthly average mortgage repayments by at least A$150 ($132). Reserve Bank Governor Glenn Stevens left the benchmark rate unchanged this week as he waits to see the impact of the earlier moves. “This may be evidence that consumers are starting to become a little more sensitive to the interest-rate environment,” said Josh Williamson, an economist at Citigroup Inc. in Sydney who forecast a 0.5 percent drop in sales. “It gives them another month or so to put further increases on the back-burner.” The Australian dollar traded at 88.06 U.S. cents at 1:24 p.m. in Sydney from 88.21 cents just before the report was released. The two-year government bond yield fell 2 basis points to 4.11 percent. A basis point is 0.01 percentage point. Retailers extended declines after the Bureau of Statistics figures. JB Hi-Fi Ltd., the best performing retailer in Australia’s benchmark stock index in 2009, sank 2.4 percent to A$20.56 at 11:54 a.m. on the Australian stock exchange. Flight Centre Ltd., the nation’s largest travel agency, dropped 3.2 percent to A$19.16. David Jones Ltd., Australia’s second-biggest department store, slumped 3.5 percent to A$4.76. Neighboring Woes Today’s Australian report adds to recent evidence that many of the world’s economies may take time to strengthen this year. Neighboring New Zealand’s unemployment rate soared to the highest level in more than 10 years, climbing to 7.3 percent last quarter from 6.5 percent in the previous three months, a report showed today. Services industries in the U.S. expanded less than anticipated in January, figures from the Tempe, Arizona-based Institute for Supply Management showed on Feb. 3. Expansion in Europe’s service and manufacturing industries slowed last month. Spending at Australian department stores fell 3.5 percent and food store sales declined 1.3 percent, today’s report showed. Consumers spent 2.5 percent more at cafes and restaurants. Retail sales, adjusted to remove inflation, rose 1.1 percent in the three months through December from the previous quarter. That matched economists’ median forecast. Interest Rates The drop in December retail sales followed Governor Stevens’s decision to increase the benchmark lending rate on Dec. 1 by another quarter point to 3.75 percent. “The retail numbers provide the first post-rate-decision justification for the central bank’s choice to leave the cash rate unchanged on Tuesday,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “We now suspect that the RBA will sit on the policy sidelines for the next eight weeks.” Further interest-rate increases, which some futures market investors expect as early as next month, will prompt consumers to cut spending, Woolworths Chief Executive Officer Michael Luscombe said last week. “Interest-rate rises are not good for consumers full stop,” Luscombe said in an interview with Bloomberg News published on Jan. 28. “I think 2010 is going to be a challenging year.” Last year’s interest-rate increases added at least A$150 to monthly repayments on an average A$300,000 home loan. ‘Secret Hope’ Woolworths, which benefited early last year as Prime Minister Kevin Rudd distributed more than A$20 billion in cash to households, last month 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. Still, some retailers have reported strong sales in December. Boxing Day sales at JB Hi-Fi Ltd., the best-performing retailer in Australia’s benchmark stock index in 2009, were “a lot better” than a year earlier, Chief Executive Officer Richard Uechtritz told the Australian newspaper in January. Australia’s economy is heading for its “next big boom,” Gerry Harvey, billionaire chairman of the nation’s largest electronics seller, Harvey Norman Holdings Ltd., said in an interview last month. “I’ve been saying for months now that the economy is recovering quite strongly,” Harvey said on Jan. 7. Consumer Confidence An index of consumer sentiment jumped in January by the most in six months, Westpac Banking Corp. said on Jan. 20. Confidence has rebounded from the height of the global financial crisis a year ago, helped by the biggest four-month employment gain since 2006. Australia’s jobless rate dropped in December to an eight- month low of 5.5 percent after employers added 135,700 jobs in four months. A separate report published today showed home-building approvals rose in December as government grants to first-time buyers helped the housing market shrug off higher borrowing costs. The number of permits granted to build or renovate houses and apartments increased 2.2 percent from November. “We are going to see a housing boom now over 2010,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “When people build their houses they are going to need more furniture and electrical goods so that medium-term story for retail is not as bad either.” Investors are betting there is a 26 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:01 p.m. Prior to today’s reports chances stood at 28 percent. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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