RBA keeps key rate at 4.75%, inflation outlook cloudy

RBA keeps key rate at 4.75% as floods cloud outlook for Australian inflation

Feb. 1 (BusinessDesk) - The Reserve Bank of Australia kept key interest rate unchanged, as expected, saying the outlook is for tame inflation though it is watching for any impact on demand from rebuilding after the floods.

The central bank kept the overnight cash rate target at 4.75%, a decision forecast by most economists. Governor Glenn Stevens said inflation over the next 12 months will be consistent with the bank's 2%-to-3% target.

Australia's terms of trade are at the highest level since the 1950s as commodity prices rise amid strong demand in economies where growth has continued apace, such as China and India, Stevens said. Yet Australian households remain cautious about borrowing and spending, preferring to increase savings.

Overall credit growth "remains quite subdued" though with signs credit has become easier, he said.

Underlying inflation was about 2.25% in 2010, helped by a strong Australian dollar, and competition has helped cap gains in utility prices.

Queensland state government has estimated the repair bill for flood damage will run to some A$5 billion and the federal government has imposed a one-time income levy of 0.5% to 1% on workers earning over A$50,000 in the 2011-2012 year.

Treasurer Wayne Swan has said the floods in Queensland and Victoria may add 0.25 percentage point to inflation this quarter and subtract about 0.5% from gross domestic product.

The central bank can 'look through' the short-term effects of flooding in Queensland and Victoria, which is having "a temporary, adverse effect on economic activity and prices," Stevens said.

The bank expects repairs and rebuilding of infrastructure and housing over the next couple of years will "add modestly to aggregate demand" without having a major impact on medium-term inflation.

"The bank will of course continue to assess the effects of the floods and the subsequent recovery, along with all the other factors having a bearing on economic conditions," Stevens said.

(BusinessDesk)

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