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Australia central bank cites China property, currency strength as risks

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Australia's central bank highlighted the risk of a crash in the Chinese property market and a still-high local dollar as key sources of uncertainty as it again forecast sub par economic growth at home.

In its 68-page quarterly monetary policy report, the Reserve Bank of Australia (RBA) also noted that recent aggressive easing by the Bank of Japan could keep the local currency higher than warranted by domestic conditions.

The central bank reiterated that the record low 2.5 percent cash rate was appropriate and kept its pledge for a period of stability in rates.

"The very accommodative monetary policy settings will continue to provide support to demand and help growth to strengthen, in time," the RBA said, adding inflation is expected to be consistent with its 2-3 percent target over the next two years. "On present indications, the most prudent course is likely to be a period of stability in interest rates."

The RBA has left the cash rate unchanged for over a year, expecting low borrowing costs to help underpin rising housing activity and home prices, which in turn should support consumption.

In time, this should encourage business investment in the non-mining sector and help offset a fading mining boom.

The central bank's forecasts for GDP growth were unchanged from the previous statement. It expected the economy to grow at 2.5 percent in 2014, picking up to 2.5-3.5 percent next year, then speeding up to 2.75-4.25 percent by 2016.

It saw underlying inflation running at 2.25 percent this year and 2.25-3.25 percent next year. It lifted its 2016 forecast to 2.25-3.25 percent versus 2-3 percent previously.

Read MoreAustralia's central bank keeps rates low, consumers encouraged

The RBA said despite the recent depreciation of the local dollar, it remained above most estimates of fundamental value, particularly in the face of big falls in key commodity prices.

"A lower exchange rate would help to achieve more balanced growth in the economy," the RBA said.

However, it noted the Bank of Japan's plan to expand its already massive stimulus program and moves by Japanese pension funds to increase holdings of foreign assets might result in capital flows that could "hold the Australian dollar at a higher level than real economic fundamentals would imply".

On the Chinese property market, the RBA warned that a very large and protracted decline would likely hit demand for Australia's exports of bulk commodities and the prices received for them.

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"If growth of Chinese steel production was to weaken a lot further, without accompanying cuts to iron ore and coking coal production globally, further commodity price falls may eventuate. This would have implications for the revenue of Australian miners," it said.

In such an event, higher-cost Australian miners could be forced to close unprofitable mines, especially in the coal industry, leading to lower exports than otherwise.

The RBA noted that while Chinese authorities have taken some action recently to support activity in the property market, it remained to be seen if these action will be enough to avoid a protracted slump.