Australia retail sales edge higher as shoppers stay cautious

SYDNEY (Reuters) -Australian retail sales rose modestly for a second straight month in February as a long-awaited cut in interest rates combined with slower inflation to boost consumer sentiment and spending power.

However, the recovery in consumer spending is still tepid, suggesting consumers remain cautious and would not be a bar to more policy easing. The Australian dollar was steady at $0.6241 and three-year bond futures were little changed at 96.31.

Data out from the Australian Bureau of Statistics (ABS) on Tuesday showed retail sales added 0.2% in February from January, when they gained 0.3%. The outcome was just below market forecasts of a 0.3% increase.

Sales were up 3.6% on a year earlier at A$37.1 billion ($23.14 billion), with the ABS noting the February gain was largely due to food and eating out, with demand for household goods falling in the wake of year-end discounting.

"Some overhang is to be expected after a very strong quarter of sales in Q4... Discounting activity at the end of 2024 pulled forward some spending, and conditions in this component may be subdued for a little longer yet," said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.

"The fundamentals for consumer spending are still sound, with real income growth improving and the labour market in a tight position," he added.

The consumer recovery, aided by slowing inflation and the first rate cut in more than four years in February, has helped the economy rebound after a long period of meagre growth.

The outlook is also brighter given the government is promising new income tax relief in 2026 and 2027 along with more cost-of-living support for households in a bid to win a general election on May 3.

The Reserve Bank of Australia is widely expected to hold the cash rate at 4.1% later on Tuesday, having warned the prospects of further policy easing are not guaranteed after its February rate cut.

Swaps imply a scant chance for a move, but some in the market are betting a quarterly inflation report due at the end of the month could open the door to another easing in May, which is about 77% priced in.

For all of 2025, a total easing of 70 basis points is expected, equivalent to almost three rate cuts.

($1 = 1.6036 Australian dollars)

(Reporting by Stella Qiu and Wayne Cole; Editing by Christopher Cushing and Jamie Freed)