Interest rate hike 'more likely' after flood disaster

Wednesday 19 January 2011

Article by Mozo

The Reserve Bank (RBA) is under greater pressure to lift interest rates following the Queensland flood disaster, it has been suggested.

Interest rate hike 'more likely' after flood disaster

HSBC economist Paul Bloxham pointed to the growing pressure on inflation in the wake of the crisis, with food prices and wages tipped to go up as the rebuilding effort starts.

"Food prices will rise due to the floods … against the backdrop of food markets which were already pretty tight," he told the Herald Sun, noting that Queensland accounted for almost a third of domestic fruit and vegetable production.

"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."

Such inflationary pressures come after data revealed that underlying inflation hit 3.2 per cent in the year to December 2010, thus exceeding the RBA's target range of two to three per cent.

According to Mr Bloxham, the RBA will look to ease these pressures by lifting the official cash rate in the second quarter of the year.

He also tipped the rate to rise by a total of 75 basis points by the end of 2011.

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