Newspaper article Sunshine Coast Daily (Maroochydore, Australia)

Dark Clouds Also Bring a Silver Lining

Newspaper article Sunshine Coast Daily (Maroochydore, Australia)

Dark Clouds Also Bring a Silver Lining

Article excerpt

WEAKER than expected inflationary pressures, the housing market's continued subdued nature and uncertainty over the economic impact of the floods have come to the rescue for hard-hit mortgage holders.

In its first meeting of the year on Tuesday the Reserve Bank opted to keep rates on hold at 4.75%. The decision comes on the back of economic data out last week showing inflation was running lower than expected.

Yet this summer's floods are unlikely to alter the course of interest rates. Economists believe borrowing costs will still head higher later this year.

Central bank governor Glenn Stevens, in his first opportunity to comment on the floods, said they would have a C[pounds sterling]temporary adverse effectC[yen] on the economy.

C[pounds sterling]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,C[yen] Mr Stevens said in a statement.

But new data showed the floods had rattled business confidence. The governor said the rebuilding work in affected areas over the next year or two would add modestly to demand, but the bank's initial assessment was that this was unlikely to have a major impact on the medium-term inflation outlook.

C[pounds sterling]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,C[yen] he said.

The central bank expects inflation will be consistent with its 2% to 3% target over the next year, after recent moderate price increases. Still, Mr Stevens said China and India were enjoying very strong economic expansions, and Australia's terms of trade were at their highest level since the 1950s, with national income growing strongly.

While he expected employment growth would likely be at slower pace this year after showing unusual strength in 2010, wages growth had picked up and further increases were likely over the next 12 months.

TD Securities head of Asia-Pacific research Annette Beacher does not believe the RBA has finished raising rates yet and is anticipating a 25-basis-point increase in May. …

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