RBA keeps interest rate on hold at 4.75%

The Reserve Bank of Australia has decided to keep the official interest rate steady at 4.75% this month, with the floods in Queensland softening economic activity.

In a statement, RBA governor Glenn Stevens said while several aspects of the economy, including terms of trade, employment growth and inflation are all travelling well, the impact of the floods in Queensland is having a “temporary adverse effect on economic activity and prices”.

“Some production of crops and resources has been lost and some other forms of economic output have also been lower in the affected areas,” he said.

Stevens also noted that prices for commodities have risen following the floods, and are likely to remain higher during the short-term – something the board will take into consideration when making decisions on interest rates.

“Resumption of production is occurring at differing speeds by region and industry. 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.”

Stevens also noted the floods have caused significant damage to physical capital, and that the efforts to repair or replace infrastructure and housing will add some modest demand compared with that which would have occurred anyway.

“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,” he said, but adds that any additional demand is unlikely to add to inflation.

Stevens noted a continued caution in spending and borrowing, and a continued increase in the savings rate.

Stevens also noted that global output grew strongly in 2010, and the global economy looks strong going into 2011. Inflation also continues to be on target, but Stevens says the board will continue to assess the effects of the floods and a subsequent recovery when considering monetary policy.