Australia’s retail sales strengthened for the third consecutive month in October, boosted by tax cuts increasing disposable income and growing consumer confidence that interest rates would remain unchanged, even though further policy easing still seemed unlikely.

Inventory data indicated some economic drag in Q3, but the positive contribution from net exports suggests that overall growth likely accelerated.

According to the Australian Bureau of Statistics (ABS), retail sales increased by 0.6% in October compared to September, following a modest 0.1% rise the previous month. Analysts had expected a 0.4% gain in October, Reuters reports. 

Sales were 3.4% higher compared to the same time last year, reaching A$36.7 billion. The ABS highlighted that some retailers had started offering discounts early, in anticipation of the November Black Friday events.

“After a steady result last month, retailers told us that sales activity grew in October ahead of the Black Friday sales,” stated Robert Ewing, head of business statistics at the ABS.

“The rise in discretionary spending was driven by online discounting events, while people also spent more on electrical goods, particularly televisions and other audio-visual equipment.”

The sales outlook has been supported by a slowdown in inflation and significant income tax cuts. Consumer sentiment, in particular, surged for the second consecutive month in November, reaching its highest level in two and a half years.

The Reserve Bank of Australia (RBA) has kept interest rates steady at 4.35% for the past year and has largely ruled out any near-term rate cuts, partly due to the strong resilience of Australia's labour market.

“The downside risk (to consumption) has certainly reduced, reinforcing that the RBA should not be in a rush to cut rates, given too high services inflation,” according to Tapas Strickland, head of markets economics at the National Australia Bank (NAB).

NAB anticipates another solid rise in retail sales for November.

Furthermore, the RBA had forecast a rebound in household spending later this year, thanks to the billions in tax cuts introduced in July. However, policymakers have emphasised that the strength of this recovery will play a key role in shaping the prospects for future policy easing.

Markets are pricing in almost no chance of a cut to the 4.35% cash rate at the RBA's next meeting on 10th December, with only a 24% probability of a rate change in February.

A rate cut isn't fully expected until May next year.

ANZ forecasts that economic growth likely accelerated to a 0.5% quarterly gain in Q3, following three quarters of more modest 0.2% expansion.

“The accounts should show strong growth in household incomes. That reflects the impact of ongoing growth in wages and salaries, the Stage 3 tax cuts, and cost of living measures,” said Adam Boyton, head of Australian economics at ANZ.