UPDATE 1-Australian retail sales bounce in May as discounting tempts

Writes through with background and building data

By Wayne Cole

SYDNEY, July 3 (Reuters) - Australian retail sales enjoyed a rare bounce in May as discounting and early sales events tempted consumers who were otherwise struggling with stubborn inflation and painfully-high mortgage rates.

Data from the Australian Bureau of Statistics (ABS) on Tuesday showed retail sales rose 0.6% in May from April, when they edged up 0.1%. Analysts had looked for an increase of 0.2%.

Sales of A$35.9 billion ($23.9 billion) were up 1.7% from a year earlier, but still well below annual population growth of a brisk 2.5% implying less spending per person.

"Retail turnover was boosted by watchful shoppers taking advantage of early end-of-financial year promotions and sales events," Robert Ewing, ABS head of business statistics, said.

"Retail businesses continue to rely on discounting and sales events to stimulate discretionary spending."

Spending may have been brought forward into May from June, when end of financial year sales are usually concentrated. Recent bank data on card transactions suggest June was sluggish, with Westpac analysts estimating that spending could be down around 1% for the second quarter as a whole.

This weakness is very much the intended consequence of high interest rates as the Reserve Bank of Australia (RBA) battles to contain inflation, currently running at 4% a year.

The central bank has been holding rates at a 12-year high of 4.35% for months but is a further increase might be necessary should inflation not slow as hoped.

While consumption has cooled as desired, there is a risk it could pick up again when sweeping tax cuts take effect this month giving average wage earners an extra A$1,500 a year.

House prices have also been rising steadily this year as a rush of migrants stretch limited supply, increasing the wealth of home owners. The ABS estimates household wealth rose 10% in the year to March, worth a cool A$1.5 trillion.

The outlook for housing supply also remains constrained with data out Wednesday showing approvals to build new homes climbed 5.5% in May, mainly due to apartment construction, although that was still down 8.5% from a year earlier.

Were consumers to convert even some of this extra wealth into spending it could pile pressure on the RBA to raise rates further.

Markets are wagering there is around a 50-50 chance a another quarter-point hike this year, and see little scope for an easing until July 2025.

(Reporting by Wayne Cole; Editing by Jacqueline Wong and Edwina Gibbs)