Australia retail sales slip, add to rate doubts

By Wayne Cole

SYDNEY (Reuters) - Australian retail sales fell unexpectedly in September to set the seal on a soft third quarter -- payback for fiscal-driven strength earlier in the year, which adds to doubts about the need for a near-term rate rise.

The Australian dollar slipped a third of a U.S. cent while interest rate futures edged up as investors rowed back on bets the Reserve Bank of Australia would raise rates in December.

"The sales figures are certainly an indication of policy fade coming through," said Michael Blythe, chief economist at Commonwealth Bank. "These numbers won't stop future rate rises but the odds on a move in December are starting to lengthen."

The central bank, the RBA, lifted its cash rate by 25 basis points to 3.5 percent on Tuesday, the second hike in as many months, as it steadily withdrew stimulus from a surprisingly strong economy.

Up until then, the market had been fully priced for a move to 3.75 percent in December, but the RBA's commitment to tightening only gradually threw that into doubt.

By Wednesday, interbank futures were implying a one-month rate of 3.63 percent for December, while a measure from Credit Suisse showed a 50-50 chance of a hike.

The government's retail numbers showed a 0.2 percent drop in sales for September, confounding analysts' forecasts for a 0.4 percent rise, as shoppers spent less on household goods, clothing and at department stores.

That left sales down 0.4 percent for the third quarter as a whole at A$56.96 billion ($51.5 billion) in inflation-adjusted terms. That was the first quarterly drop in a year and in large part reflects a natural pullback from fiscal-induced spending.