New Zealand retail sales rise, but rates on hold

New Zealand retail sales volumes sprinted past expectations in the second quarter to offer yet more evidence of an improving economy, yet a rise in interest rates is still considered unlikely amid an uncertain global outlook. Sales volumes, which strip out price movements, rose a seasonally adjusted 0.9 percent in the three months to June 30, handily beating expectations for an 0.6 percent rise.
The shopping spree was led by a 10 percent jump in electronic goods volumes, while motor vehicles and parts climbed 4.2 percent from the first quarter. "This adds to the run of encouraging domestic data, but at the moment global risks are dominating market attention and we think that will leave the RBNZ remain on hold until December," said ASB Bank economist Christina Leung. The New Zealand dollar rose to a high of $0.8296, from $0.8277 before the data. It later steadied around $0.8280. Interest rate futures were initially unmoved but then fell by up to 7 ticks as the chances of a rate hike next month increased slightly.
Still, based on overnight index swaps, pricing for a 25 basis point rate hike on September 16 remained around 16 percent. Before the recent global market turmoil, expectations for a 50 bps hike were as high as 70 percent. The data offered new evidence that the domestic economy is resilient despite a fragile global outlook, with attempts to rein in rising government debt in Europe and the United States expected to dent demand there.
Sales were boosted by a stronger showing in Christchurch after the devastating earthquake in February, with hardware, building and garden supplies and fuel sharply higher than the rest of the country. "The economy was indeed tracking well in the first half, with some earthquake-related activity apparent," said RBC strategist Michael Turner. "Prices remained reasonably subdued, though consumers were generally responsive to discounting."
The Reserve Bank of New Zealand held its cash rate at 2.5 percent last month but said there was little need for the rate to stay at the record-low equalling level should global financial risks recede and the economy continue to recover. Since then, global risks have increased, leading analysts to conclude the bank will be in no hurry to hike even as the economy surprises with its resilience.
The job market appears to have bottomed out, with the unemployment rate holding steady at 6.6 percent in the June quarter and credit card spending rose for a fourth month in a row in July amid stabilising housing market. The latest retail sales data also hinted at another solid quarter for the GDP, after the economy grew 0.8 percent in the first quarter, the fastest pace in more than a year, as it shrugged off the devastating earthquake in February.
"The question is whether people will continue to spend in a more uncertain global environment. But for now, it's consistent with GDP growing around 0.5 percent," said Deutsche Bank chief economist Darren Gibbs. Analysts expect the economy to gather momentum later in the year, led by tourism and spending surrounding the Rugby World Cup and the NZ$15 billion ($12.3 billion) rebuilding of Christchurch.