Floods to stoke inflation

By webmaster

Economists have raised their forecasts for inflation on the back of the Queensland and Victoria floods but a rise in the cash rate still remains unlikely for some time.

HSBC chief economist Paul Bloxham said today that it was widely expected that the floods would boost inflation as a result of additional pressure on wages in the wake of the mammoth task of reconstruction.

“We have raised our forecasts for headline inflation to 3.4 per cent over 2011 and for underlying inflation to 3.3 per cent.”

Last month, HSBC had both inflation measurements down as 3.2 per cent.

Meanwhile, a report released yesterday by TD Securities-Melbourne Institute showed inflation rose 0.2 per cent in December bringing the annual rate to 3.8 per cent, well above the RBA’s preferred target of two to three per cent, pointing to increasing inflationary pressures in the months ahead, without consideration of the floods.

(The Australian Bureau of Statistics is scheduled to release official December quarter inflation figures on January 25.)

“The consequences of the Queensland floods leaves inflation risks firmly tilted to the upside, where the immediate fallout is a likely spike in food price inflation in the March quarter,” Annette Beacher, head of Asia-Pacific Research at TD Securities, commented.

Despite the increased inflation forecasts, it is unlikely however that the Reserve Bank will lift the cash rate again before the second quarter of the year, HSBC’s Mr Bloxham said.

According to Mr Bloxham, any inflation increases won’t be felt until at least June, which will then force the RBA to lift the official cash rate up to one per cent higher before year’s end.

AMP’s Shane Oliver is also not expecting the Reserve Bank to move on the cash rate until as late as May or June.

"Our view is that the balance of probabilities still favours further, albeit gradual and modest monetary tightening in Australia in 2011 with the cash rate still rising to 5.5 per cent by year end," Mr Oliver said last week.

While a pause in interest rate rises may be good news for some, it will be cold comfort to those borrowers whose homes have been directly hit by the floods.

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