Rates on hold as RBA looks beyond flood fallout

RBA decides to leave rates unchanged and says recent floods are only likely to have a short-term effect on economy

By Brad Gardner | February 1, 2011

The Reserve Bank has held off increasing interest rates and says the floods in Queensland and Victoria are only likely to have a short-term effect on the economy.

Meeting today, the RBA board decided to leave rates at 4.75 percent. Governor Glenn Stevens says inflation is tracking at 2.25 percent and is expected to remain in the RBA’s band of 2 to 3 percent.

While noting the floods damaged crop production and resources, Stevens indicated they were not a primary reason for leaving rates unchanged.

"The flooding in Queensland and Victoria is having a temporary adverse effect on economic activity and prices," he says.

"In setting monetary policy the Bank will, as on past occasions where natural disasters have occurred, look through the estimated effects of these short-term events on activity and prices. The focus of monetary policy will remain on medium-term prospects for economic activity and inflation."

As governments pledge funds to rebuild infrastructure and houses damaged in the floods, Stevens anticipates the increase in building activity will have a negligible effect on inflation.

"The Bank’s preliminary assessment is that the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation," he says.

Stevens believes the rebuilding efforts over the next year or two will "modestly" add to demand.

"The Bank will of course continue to assess the effects of the floods and the subsequent recovery, along with all the other factors having a bearing on economic conditions," he says.

In a sign many businesses are regaining confidence, Stevens says private investment is increasing on the back of high commodity prices.

He says employment growth was unusually strong last year and will continue to grow albeit at a slower rate.

"After a significant decline in 2009, growth in wages picked up somewhat last year. Some further increase is likely over the coming year," Stevens says.

Retailers will continue to struggle, however, with Stevens saying households continue to be cautious about spending and borrowing.

Despite ongoing concerns about sovereign creditworthiness in Europe, the RBA expressed confidence in global economic growth.

It says global output grew strongly in 2010, particularly the Chinese and Indian economies. The RBA anticipates growth to continue strongly this year.

"Australia’s terms of trade are at their highest level since the early 1950s and national income is growing strongly," Stevens says.

"Commodity prices have remained high and in many instances have risen further over recent months."

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