Where will the Brisbane floods leave interest rates?

Now as Brisbane faces a massive clean up effort, experts begin to speculate on what the flood crisis means for the Australian economy and interest rates specifically. Some say they’ll go up and some down, as a result of this tragedy…so who is right?

In two separate articles in the Herald-Sun, economists made contradictory predictions about the fate of inflation and interest rates in the wake of the Queensland floods.

On the one hand, HSBC’s Paul Bloxham has increased his inflation forecast, suggesting there will be renewed wages pressure as Queensland rebuilds.

In addition, new data has recently been released that indicates the prices of imported goods are not falling fast enough to counteract inflation, even despite the high Aussie dollar.

Annual inflation for 2010 was reported by the TD Securities-Melbourne Institute to be 3.8%, with underlying inflation at 3.2% in the year to December; surpassing the Reserve Bank’s target range of 2 to 3%. The higher than expected figure was largely due to significant increases in the cost of fuel, fruit and vegetables, holiday travel and accommodation.  

TD Securities analyst Annette Beacher said inflation risks from the Queensland floods were, “firmly tilted to the upside, where the immediate fallout is a likely spike in food price inflation.”

Bloxham says food prices will continue to rise in the wake of the disaster with Queensland supplying almost a third of Australia’s domestic fruit and vegetable produce.

“Food prices will rise due to the floods…against the backdrop of food markets which were already pretty tight,” he observes.

“The more important issue is that, with the labour market already around full employment, additional expenditure on reconstruction and repair will put further upward pressure on wages and thus inflation.”

Bloxham predicts that interest rates will be pushed up by 0.75% this year and 100 basis points by the first quarter of 2012 to 5.75%, as the RBA continues to counter inflationary pressures.

That’s one side of this contentious debate. However opposing this argument is RBA director Donald McGauchie, who in a separate Herald-Sun article said the floods could have a “substantial” effect on our export income.

While JP Morgan chief economist Stephen Walters has suggested that a rate rise in the near future in the wake of the floods is unlikely.

Initially forecasting an increase from the RBA in February, he says that’s now looking less likely; “I don’t think the RBA board members are particularly inclined to kick Queensland when they’re down with a rate hike.”

“Would the US have raised interest rates during Hurricane Katrina? Probably not.”

He said although a “spike” in food prices was on the cards due to the destruction of Queensland crops, the RBA would view this as temporary and that the coking coal industry, which produces 50% of global supplies, had “effectively shut down.”

Bucking the trend of predicting ups and downs due to the flood crisis is TD Securities’ Roland Randall, who claims it will have very little impact on interest rates at all in the big scheme of things.

“While the flooding is very serious and of course the personal tragic cost is very great, when you look at it in terms of its (economic) impact at the national level, it is actually quite small,” he said.

Randall notes that Queensland’s mining industry and agricultural sectors account for just 3% and less than 0.5% respectively, of Australia’s GDP. He adds that the RBA cannot adjust interest rates according to the economy of just one region, but must set monetary policy that is “appropriate for the entire country.”


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