Australia house prices moderate, inflation picks up

SYDNEY: Australia's house prices posted their smallest quarterly rise since early 2009, indicating the red-hot sector was losing some steam and helping bolster views that interest rates are likely to stay on hold this week.

But a gauge of consumer prices showing a pick up in price pressures in October after a run of subdued months, likely means the inflation-wary Reserve Bank of Australia (RBA) will keep the door open to further policy tightening.

"The data showed house prices have moderated... and really just reinforces the Reserve Bank will probably pass tomorrow. But we don't think we're out of the woods in terms of rate hikes," said John Peters, senior economist at Commonwealth Bank.

The RBA meets on Tuesday, Nov 2 and is widely expected to hold interest rates steady at 4.5% for a sixth month running, a Reuters poll taken last Friday showed.

The majority of respondents, however, believed the RBA will deliver a 25 basis point rate hike before the year is out.

The RBA has made clear it expects price pressures to grow as surging export earnings and booming mining investment lift economic growth in coming months.

It said its decision not to raise rates in October was "finely balanced" and it could not wait "indefinitely" to tighten given long-term risks to inflation.

Adding to the uncertainty of a rate hike this week, the Federal Reserve is expected to announce a plan to pump more money into a flagging economy at the end of the Federal Open Market Committee's two-day meeting on Wednesday.

In Australia, markets are priced for a 22% chance of a rate rise on Tuesday.

Official data last week showing a key measure of underlying inflation ran at a five-year low of 2.5%, bang in the middle of the RBA's target band of 2%-3%, had prompted markets to slashed the risk of a move this week.

But the monthly inflation survey suggested inflation may have hit a low for this cycle.

"This pickup in price pressure hints that inflation in the third quarter could prove to be the low point for this cycle," said Annette Beacher, a senior strategist at TD Securities.

The TD Securities-Melbourne Institute measure of consumer price inflation rose 0.3% in October, posting its largest monthly increase since June. This compared with a rise of 0.1% in September.

The annual pace spiked to 3.8%, from 3.2% in September, though mainly because of base effects as a petrol-driven 0.3% drop in October last year fell out of the calculation.

A government measure of city house prices rose just 0.1% in the September quarter from the previous quarter, continuing to ease from the 5.5% pace seen in the December quarter of 2009.

The report, however, covers only detached houses in the major cities, and misses apartments and the entire countryside.

"Our view is that the HPI is slightly over-representing the strength of price momentum at present, since it omits participants in the lower end of the market, who are less likely to purchase detached houses," said JPMorgan analyst Ben Jarman. — Reuters
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