Rate hike 'could hurt consumer spending'

Australian National Retailers Association (ANRA) chief executive Margy Osmond said tax cuts will help absorb the increase but another hike could have more serious consequences for consumers.

"This will cut into disposable income and go some way to offsetting the tax cuts and one-off payments delivered in the federal budget, which had given the average household a bit of a mortgage buffer and a few extra dollars to spend," Ms Osmond said.

Recent data from the Australian Bureau of Statistics (ABS) showed an upbeat retail environment with retail trade rising 1.4 per cent to $19.18 billion in June and the unemployment rate, at 4.3 per cent, tracking just above a 33-year low.

But Ms Osmond said consumer spending could be dented if rates rise above the 6.50 per cent level set by the Reserve Bank of Australia on Wednesday.

The 25 basis point hike has taken rates to the highest level since November 2006.

"The knock-on effects are likely to be a dampening in consumer confidence and spending and higher credit growth, which will no doubt become apparent in the coming months," she said.

Upmarket retailer David Jones Ltd, which reported annual sales on Wednesday, shrugged off the impact on its clientele, noting the record sales growth it had experienced amid three interest rate hikes last year.

"For our shoppers and our customers, whilst it's (an) important fact to consider, it's not the primary driver of their motivation," David Jones chief executive Mark McInnes said.

"I think it's more likely to affect the tougher demographies around the country and we're not represented in those."

Mr McInnes said the housing market and sharemarket had a bigger impact on consumer confidence than interest rates.

"It seems that house prices around the country are growing in our core demographies - quite significantly in some of the states," he said.

"The sharemarket has got a little bit of volatility but it's too hard to tell whether that has had any dampening effect on confidence yet."

David Jones' sales rose nine per cent to $1.98 billion in 2006/07, or 8.3 per cent on a like-for-like basis.

An analyst, who did not wish to be named, agreed the department store's customers were not as sensitive to rate hikes as the sharemarket or house prices.

Furniture and consumer electronics retailer Harvey Norman Holdings Ltd has also shown vigour.

It generated $5.34 billion in sales in 2006/07 from stores in Australia, New Zealand, Slovenia and Ireland, compared to $4.58 billion the previous financial year.

Deutsche Bank analyst Kristan Walker said aspects of Harvey Norman's business were resilient to macro events.

"For some reason interest rates can go up and petrol prices can be tested at highs, yet people still want to go out there and get their plasma TV," Mr Walker said.

"We have got a buy on Harvey Norman and have for a little while, and we really think that Harvey Norman should perform well."

He said although the retailer was exposed to the troubled housing market through its furniture and whitegood products, technology-related categories were expected to hold up well.