The Reserve Bank of Australia (RBA) is unlikely to raise the cash rate until May, as the nation fully assesses and recovers from damaging floods earlier in the year.
All 11 economists surveyed by AAP said they weren’t expecting the central bank to take the cash rate above its current 4.75 per cent when its board meets next Tuesday.
Nomura Australia chief economist Stephen Roberts said the bank would be reluctant to raise rates so soon after the floods that swept Queensland in late December and early January.
“It is too close after the flood events and natural disaster events. It’s a little too soon to be raising rates,” he said.
“The inflation rates were very benign. Some the other data has been firmer, but it doesn’t outweigh the (inflation rate) yet.
“There’s definitely hints that more rate hikes are coming, but it’s the timing of those hikes.”
Mr Roberts said without the floods, the central bank may have had cause to raise the cash rate sooner than May in anticipation of pressures soon expected to hit the economy.
One such pressure comes from the jobless rate, which fell to five per cent in January, close to a two-year low.
A jobless rate below five per cent, called full employment, is a traditional inflation trigger.
However, the floods are also estimated to have harmed some sectors of industrial output, such as coal mining.
In the minutes of its February statement, the RBA said it estimated a 15 per cent drop in coal production in the first quarter of the year due to flooding across Queensland’s mines.
But the bank also forecast the effects to be short term, with the economy expected to have fully recovered by the June quarter.
Meanwhile, inflation, the traditional interest rate trigger, was lower than expected in the last quarter.
Australia’s annual underlying rate of inflation was around 2.25 per cent in the year to December, safely within the RBA’s target of two to three per cent.
Commonwealth Bank economist John Peters said the bank was managing a different set of economic circumstances than most global economies.
The RBA was the first G20 central bank to lift its cash rate from historic lows amid the global financial crisis as Australia’s economy appeared to pick up steam faster than its G20 partners.
In response, between October 2009 and November 2010 the cash rate went from a 49-year low of three per cent to its current rate.
“It’s a matter of the Reserve Bank managing prosperity, in sharp contrast to … the rest of the advanced world still worrying about toppling into a deflationary spiral,” Mr Peters said.
HSBC chief economist Paul Broxham didn’t expect the RBA to raise rates as much as they should in the near term, given the strength in the economy.
Mr Broxham, a former RBA economist, said while the RBA has been reluctant to raise the cash rate in recent meetings, strong domestic economic growth in 2011 could make future rate hikes inevitable.
“Inflation was held down in the tail-end of last year by the large exchange rate appreciation, which we don’t expect to be repeated,” he said.
“The cautious consumer has also held down inflation to some degree – at least that’s the RBA’s view. Again, we don’t think that will persist either.”
Story Source www.ninemsn.com.auTags: finance, interest rates, money, news, reserve bank