Reserve Bank Inflation

RBA holds interest rates at 4.75% due to Queensland floods

The Reserve Bank of Australia Board in its meeting today decided to hold official interest rates unchanged at 4.75 percent due to the dampening effect on inflation and economic activity as a result of the floods in Queensland.

Interest Rates - Reserve Bank of AustraliaThe RBA in its statement said that employment growth was unusually strong in 2010, with most leading indicators suggesting further growth, though most likely at a slower pace. After the significant decline in 2009, growth in wages picked up somewhat last year.  Some further increase is likely over the coming year.

Reserve Bank Governor Glenn Stevens said in a statement that the flooding in Queensland and Victoria is having a temporary adverse effect on economic activity and prices. Some production of crops and resources has been lost and some other forms of economic output have also been lower in the affected areas.”

“The floods also resulted in damage or destruction to physical capital in the affected regions. Over the next year or two, the efforts to repair or replace infrastructure and housing will add modestly to aggregate demand, compared with what would otherwise likely have occurred. The extent of this net additional effect will depend on the full extent of the damage, the speed of the rebuilding, and the extent to which other public and private spending is deferred. 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.” Governor Stevens said.

Mortgage Choice spokesperson Kristy Sheppard sees the RBA’s announcement as good news for borrowers.

“This result is a blessing for those who are still adjusting to a new household budget after the November rate rise and ‘silly season’ spending. It will please all borrowers who are repaying debt at a variable interest rate.” she said.

“Lender interest rates are now above what the Reserve Bank sees as ‘neutral’ so it would need a good reason to raise the cash rate again so soon. Despite low unemployment and an imminent resources boom, there’s not yet enough reason to put further pressure on consumer and business consumption, especially given the unknown inflationary effect of recent flooding.

”However, economists are saying it still looks likely we’ll see at least one or two rate rises this year, so borrowers should prepare now by adding a little more to each mortgage repayment. If we don’t see any rate rises that’s terrific – they’ve given their mortgage some leg room while reducing the loan term and interest owed.”

Related Stories