Floods and slowing economy should keep rates on hold: Economists

The Reserve Bank of Australia is widely expected to leave interest rates on hold today at 4.75% as the central bank takes stock of the impact of Queensland’s flood disaster, the impact of weak consumer confidence and the outlook for inflation.

While the TD Securities-Melbourne Institute inflation gauge released yesterday suggests inflation had increase 0.4% in December, this was largely driven by food and vegetable prices and petrol, which is rising as oil prices climb.

CommSec’s chief economist Craig James says the RBA is likely to look past these temporary issues and examine more closely what underlying inflation is doing.

On that front, there is good news for borrowers – last week’s official consumer price index figures showed underlying inflation was running at the bottom end of the RBA’s 2-3% target band in the December quarter.

“It is clear that rising petrol prices will boost the inflation rate in coming months. However, there is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland – a key driver of changes in fruit and vegetable prices.”

“If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011.”

ANZ senior economist Amber Rabinov is another predicting rates will remain on hold today, but she says the RBA will eventually have to act as inflationary pressures build over the medium-term.

“We forecast the RBA to remain on the policy sidelines over the next six months before stronger, big picture developments again begin to dominate the national economy.”

“A 25-basis-point rise in the cash rate is forecast for the third quarter of 2011, and followed up in fourth quarter by another rise to take official interest rates to 5.25% by the end of the year.”

ANZ is then tipping there will be another two 25-basis-point hikes in 2012, to take the cash rate to a peak of 5.75% by the end of 2012.

SmartCompany will report on today’s rates announcement shortly after 2:30pm AEDST.