Wellington, Oct 14 NZPA - Core retail sales, which exclude the vehicle-related industries, fell by a greater-than-expected 0.6 percent in August, leading economists to predict that interest rates will remain low.

The decline was more than the 0.2 percent fall the market was expecting and the NZ dollar fell from just above US76c to around US75.67c on the release of the data but went on to recover.

"The Reserve Bank of New Zealand (RBNZ) will retain the official cash rate OCR at its present setting for the balance of this year, before resuming policy normalisation early next year, but most probably not before the March monetary policy statement meeting at the earliest," Deutsche Bank economists said.

The RBNZ has raised the OCR twice but kept it unchanged at 3 percent when releasing its monetary policy statement on September 16.

Statistics New Zealand (SNZ) said that seasonally adjusted retail sales edged down less than 0.1 percent, or $2 million, in August from July. The biggest rises were in vehicle sales, which rose 2.3 percent, or $14m, and in vehicle fuel sales which gained 2.1 percent, or $11m.

The biggest falls were a 5.8 percent drop in hardware sales, and a 2.2 percent fall in appliance sales.

Fifteen of the 20 industries in the core retail group recorded decreases in August, SNZ said.

Supermarket and grocery stores, which make up about 30 percent of core retail sales, recorded little change, down 0.3 percent or $4m.

In actual terms, total retail sales were up 2.3 percent, or $120m, in August compared with a year earlier. Core retail sales rose 0.1 percent, or $4m.

Deutsche Bank said the headline sales number was underpinned by a 2.3 percent month-on-month rise in motor vehicle sales and a 2.1 percent month-on-month rise in fuel retailing.

Hardware retailing and appliance retailing both suffering from a weak housing market activity and reduced discretionary spending may have affected accommodation and recreational goods retailing. Real Estate Institute of New Zealand data released today also indicated a weak housing market in September.

"The message for the RBNZ is to take an early summer break and see how things look in 2011 -- no need for higher rates anytime soon," Bernard Doyle, strategist at Goldman Sachs & Partners New Zealand said.

The retail sales series is regarded as volatile and evidence of shoppers trying to beat the October 1 rise in goods and services tax was mixed.

"Smoothing through the monthly volatility it is apparent that retail spending is continuing at a moderate pace, with retail increasing by 0.8 percent in the three months to August," ANZ said.

"Consumers remain focused on the state of their finances and are tightly managing spending," ANZ said.