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SYDNEY: Australian house prices fell sharply last quarter as higher mortgage rates cooled the market and the local dollar broke above US$1.1000 (RM3.267) for the first time since 1982, news that could lessen the growing pressure for higher interest rates.
That would be welcome to the Reserve Bank of Australia (RBA) which holds its May policy meeting on Tuesday, May 3 in the wake of an alarmingly high reading for 1Q inflation.
The central bank is widely expected to keep rates at 4.75% for a sixth straight month, but might also warn that further tightening will be needed in coming months.
"The case is growing for a move in the next few months, if not by July then certainly August," said Paul Bloxham, head of Australian economics at HSBC.
"One reason to pause is the Aussie dollar, which is really on the move," he added. "We may need to wait for a couple of months to see how far it can go and whether that will help restrain inflation."
The RBA has strived to be pre-emptive in restraining inflation, raising rates seven times between October 2009 and November 2010. That in turn took a lot of steam out of the housing market, which had been running hot early last year.
Government figures on prices for detached houses in the major cities showed a fall of 1.7% in 1Q, the largest drop since the global financial crisis knocked prices down 2.6% in 3Q of 2008.
Prices were also off 0.2% on 1Q of last year, a marked slowdown from the blistering growth pace of nearly 19% in early 2010.
That pullback is exactly what the RBA wanted to see and will be one reason for it to skip a hike on Tuesday.
A Reuters poll of 20 analysts taken last Friday found all but one expected rates to stay on hold this month, though a majority expected a further hike sometime in 3Q.
Futures markets have been implying less risk of a move, in part in the belief the strong Australian dollar would help restrain inflation. The Aussie touched a fresh 29-year peak of US$1.1011 on Monday having climbed 6% in the past month.
However, the surprisingly high reading for inflation in 1Q has led some investors to raise the stakes on a future hike. Interbank futures now imply a 50-50 probability of a move in July and a rise to 5% is almost fully priced in by year-end.
The government's main consumer price index (CPI) jumped 1.6% in 1Q as food and fuel costs surged, lifting annual inflation to 3.4% and above the RBA's long-term target band of 2 to 3%.
Measures of underlying inflation favoured by the central bank also rose by more than expected in the quarter, in what many analysts saw as a turning point for price pressures.
There was some better news on the inflation front on Monday with a private gauge of prices showing a pullback in food costs in April. — Reuters
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