SYDNEY • Australia's central bank will keep its policy powder dry today as property bubbles in the nation's biggest cities raise financial stability risks, while the turmoil in Greece pushes down the South Pacific nation's dollar.
The Reserve Bank of Australia (RBA) will hold interest rates at a record-low 2 per cent, economists and markets have predicted, after quarter-point cuts in May and February. House prices in Sydney and Melbourne soared last month by the most since regulators announced plans to crack down on lending to investors.
Australia's response to the unwinding of its record mining investment boom has fallen to the RBA as lawmakers dismiss calls at home and abroad to speed up reform and deploy stimulus to boost growth.
Aside from rate cuts, the only aid RBA governor Glenn Stevens can hope for is a decline in the local dollar. It fell below 75 US cents to a six-year low yesterday, as demand for Australia's higher-yielding assets shrank on concern that Greek voters' decision in a referendum to reject austerity would drive the country out of the euro zone.
"Developments in housing remain a key constraint," said Mr Stephen Walters, chief economist for Australia at JPMorgan Chase. "The RBA is in a holding pattern as officials watch developments domestically and offshore, including the troubling events in Europe."
Sydney home prices jumped 16.2 per cent in June from a year earlier and advanced 10.2 per cent in Melbourne following an "instant buyer reaction" to the central bank's rate cuts in February and May, said CoreLogic's head of research in Australia Tim Lawless.
Since the RBA's last board meeting, Australia's jobless rate has fallen to 6 per cent, even as some analysts questioned the data, business confidence improved and the economy recorded faster-than-forecast growth in the first quarter. Other reports show retail sales in May were weaker than expected, while the trade deficit was wider than forecast for a third straight month.
The Australian dollar yesterday touched 74.52 US cents, its weakest since May 2009. The currency had advanced 1.3 per cent last quarter, thwarting a depreciation that Mr Stevens said was needed to stem a slump in manufacturing.
Helping to keep the currency elevated - even as commodity prices have fallen 25 per cent in the past 12 months - have been higher yields on Australian assets that are drawing in foreign capital.
The country attracted more than 25 per cent of Chinese investment offshore in commercial property worldwide in the first three months this year as investors there sought refuge from volatile local markets.
Central bank holdings of Australian dollars surged 12 per cent to a record A$149.4 billion (S$151 billion) in the first quarter, data published on June 30 by the International Monetary Fund shows.
All 27 economists surveyed by Bloomberg expect the RBA to keep rates on hold at this month's meeting while traders see only an 8 per cent chance of a reduction.
A rate cut in the final quarter is predicted by nine economists as stagnant wages, a forecast record decline in business investment and plunging commodity prices point to a darkening outlook for the economy. Swaps indicate 55 per cent odds for at least one easing by the end of the year.
Mr Stevens has said he is prepared to ease rates further, while noting the diminishing returns of further cuts to an already very low policy rate. BLOOMBERG