Australian retailers are in for a sombre period this fiscal year as high interest rates squeeze household budgets, especially for discretionary spending, Citigroup said on Thursday, with expected further rate hikes likely to dent confidence even more.

The brokerage cut its fiscal 2024 earnings forecast for electronics retailer JB Hi-Fi, fashion retailer Premier Investments, auto parts retailer Super Retail, and retail conglomerate Wesfarmers.

Australia's rates have surged by 400 basis points to an 11-year-high of 4.10% in just over a year and that, Citi estimated, lowered household budgets by A$18 billion ($12 billion) in fiscal 2023 and will affect budgets by A$23 billion in the fiscal year that started on July 1.

"It appears the two recent rate rises (in May and June) following the April pause has been the final straw, pushing some consumers to restrain their spending," Citi analysts Adrian Lemme and James Wang wrote in a note.

They estimate the high rates have pushed up net household interest expense by around A$30 billion over five years through 2024.

"Given Citi forecasts another two rate rises, we think confidence will remain depressed for now," the analysts said.

Last month, UBS also warned of a significant slowdown in consumer spending in fiscal 2024 due to a higher cost of living amid slowing global growth.

Consumer firms ended Thursday deep in the negative territory, with heavyweight Wesfarmers losing 2.8%, while JB Hi-Fi, Harvey Norman, and Domino's Pizza Enterprises losing between 1.8% and 3.2%.

Coles Group and Woolworths were down less than 1%.

The silver lining in Citi's report was that it expects retail conditions to rebound in fiscal 2025 due to tax cuts this fiscal year, a growing population driven by migration, and the expected recovery in housing prices over the next half-year.

Citi's latest recommendation, price target, and earnings view:

Company Rating Price Last share EBIT (A$ MLN)

Target (A$) price (A$)

FY23 FY24 FY25

Coles Group Buy 20.20 18.14 1,990.0 2,048.6 2,234.9

JB Hi-Fi Neutral 48.00 44.11 788.6 560.7 571.3

Premier Investments Neutral 22.40 20.18 343.5 265.3 294.4

Super Retail Neutral 12.00 11.82 433 342.3 349

Wesfaremers Sell 40.00 48.41 3,672.0 3,548.0 4,181.0

Woolworths Buy 42.20 39.19 3,458.4

($1 = A$1.5011)

(Reporting by Sameer Manekar in Bengaluru; Editing by Savio D'Souza)