Nov. 4 (Bloomberg) -- Australian retail sales unexpectedly dropped in September, driving down the nation’s currency as traders added to bets the central bank may pause after two successive interest-rate increases

Sales dropped 0.2 percent from August, when they gained a revised 0.7 percent, the Bureau of Statistics said in Sydney today. The median forecast of 22 economists surveyed by Bloomberg News was for a 0.5 percent gain.

Weaker household spending gives central bank Governor Glenn Stevens scope to keep the benchmark lending rate unchanged in December after raising it yesterday for a second straight month. Today’s report shows the boost earlier this year to retail sales and the economy from Prime Minister Kevin Rudd’s A$20 billion ($18 billion) in cash handouts to consumers is waning.

“It builds the case that the Reserve Bank will remain on hold rather than push ahead with tightening” next month, said Hayden Atkins, an economist at Macquarie Group Ltd. in Sydney.

Interest-rate cuts earlier this year and government handouts “brought forward a big chunk of spending in the first half, and with a lot of those policies not being repeated, there’s been a consolidation” in the third quarter, he added.

The Australian dollar dropped to as low as 89.71 U.S. cents and traded at 90.07 cents as of 12:38 p.m. in Sydney, from 90.35 immediately before the report. The two-year government bond yield fell 4 basis points to 4.56 percent. A basis point is 0.01 percentage point.

Bets Changed

Investors are betting there is a now only a 50 percent chance Stevens will boost the overnight cash rate target by a quarter point to 3.75 percent on Dec. 1, according to interbank futures on the Sydney Futures Exchange at 12:22 p.m. Prior to Stevens saying yesterday that policy makers now judged it prudent that higher rates come “gradually,” they saw a 96 percent chance.

Spending at department stores fell 2.9 percent and clothing sales declined 0.9 percent, today’s report showed. Shoppers spent 1 percent more at restaurants. Consumer spending makes up 60 percent of the economy.

“It’s a mixed bag,” said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. “The fall comes after a decent gain in August and there are very few headwinds facing the consumer -- savings are up, and interest rates and unemployment are low.”

Consumer confidence has climbed to the highest level in more than two years, unemployment fell in September to 5.7 percent, the first drop in five months, and wages rose last quarter, recent reports show.

‘No Recession’

“In Australia, we really haven’t had a recession,” said Gerry Harvey, billionaire executive chairman of Australia’s biggest furniture and electronics seller, Harvey Norman Holdings Ltd., which is among retailers that have reported increased sales this year.

“There were some parts of the economy that copped a hiding, but for the great majority of people, things only got better,” Harvey said in a telephone interview.

Sales at retailers such as David Jones Ltd. and JB Hi-Fi Ltd. helped Australia’s economy expand 1 percent in the first half of this year, making it one of the few nations to skirt the global recession.

A separate report today showed home-building approvals rose 2.7 percent in September from August, boosted by government handouts to first-time buyers.

Grants of as much as A$21,000 ($19,000) to first-time buyers helped stoke an 8.4 percent surge in home prices in the six months through Sept. 30. Price gains were among reasons Stevens raised interest rates yesterday. Those grants have since been reduced.

Economic Growth

Treasurer Wayne Swan said on Nov. 2 the economy will expand faster than he previously forecast, growing 1.5 percent in the 12 months to June 30, 2010. In May, he forecast a 0.5 percent contraction. GDP will accelerate to 2.75 percent the following fiscal year, he said.

Stevens, the first policy maker in the world to raise borrowing costs twice this year as the global recession wanes, increased the overnight cash rate target by a quarter point in October and yesterday, taking the benchmark to 3.5 percent.

Fourteen of 17 economists surveyed by Bloomberg yesterday say he will raise the rate again next month, the first time in history the central bank would have boosted borrowing costs at three successive meetings.

Stevens slashed the benchmark rate by a record 4.25 percentage points between September 2008 and April to a 49-year low of 3 percent.

“Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” Stevens said yesterday.

Quarterly Sales

Still, with the effect of government stimulus measures “now diminishing, these areas of demand may soften somewhat,” he said.

Retail sales, adjusted to remove inflation, fell 0.4 percent in the three months through September from the previous quarter. Economists forecast a decline of 0.5 percent.

“We doubt if the fiscal fade was of much of a surprise to the Reserve Bank, which has also suggested that growth could be a little softer in the second half,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney, who forecasts Stevens will raise rates by a quarter-point in December.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: November 3, 2009 20:42 EST