RBA governor says mining the focus, not floods

Reserve Bank of Australia governor Glenn Stevens says it is reasonable to expect interest rates to remain on hold for some time, with the recent spate of natural disasters expected to hurt growth in the short term.

Speaking in front of the House of Representatives standing committee, Mr Stevens said real GDP should be noticeably lower in both the December and March quarters because of the flooding across the eastern states and Cyclone Yasi.

"By the March quarter, it could be about a percentage point lower than the pre-flood forecast," he said.

The devastation to crops is likely to push the inflation rate up around 3% by the June quarter, but Mr Stevens says the effect should be temporary.

And he does not expect the recent weather events to have any lasting impact on the economy's growth trajectory.

"We do not think the effects on activity of these events will derail the expansion," he said.

"Nor should the price effects pose a serious threat to the achievement of the medium-term goal for inflation, provided the community can understand their temporary nature and expectations of ongoing inflation remain well-anchored."

Mr Stevens says that is why the Reserve Bank Board decided to look beyond these events at its last meeting, and is keeping an eye on Australia's rising terms of trade.

Higher coal prices as a result of the floods in Queensland and extremely strong demand for Australia's commodities from China mean the terms of trade are higher than the RBA predicted 3 months ago.

"In broad terms, therefore, the main medium-term story the [Reserve] Bank has been pointing to for some time still seems to be in place," Mr Stevens said.

"We are experiencing a terms of trade event of very large size, of the type that happens only once or twice in a century."

He said mining investment could rise to 5.5% of GDP, saying it is "a big story".

With that in mind, while the governor said that the interest rate settings remain appropriate for the medium-term outlook, most market analysts expect the next move for rates is likely to be up; some predict as early as May.

The above article has been sourced from the ABC News website on 11 February 2011.

My thoughts: Based on my own research and Reserve Bank comments, growth could be 1% lower in the short term as a result of the recent floods and cyclone Yasi. However, with the strong mining sector, growth in the medium term should return to levels prior to the recent weather events.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.