Australia held interest rates steady at 4.75% today for a second month in a row and in line with expectations. The Reserve Bank of Australia said it wanted to assess the impact of devastating floods in the northeast.
Reserve Bank of Australia governor Glenn Stevens said the record deluge across an area of Queensland state larger than France and Germany was '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.
But Stevens said the medium-term impact remained unclear and the Bank judged that the 'current stance of monetary policy remained appropriate in view of the general macroeconomic outlook'.
'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,' he said.
Stevens said reconstruction, expected to cost the government $5.6 billion, would 'add modestly to aggregate demand' but the bank's preliminary assessment was that it was 'unlikely to have a major impact on the medium-term outlook for inflation'.
The total economic impact would depend on the extent of the damage, speed of the recovery and how much public and private spending was deferred as a result, he added.
The Bank had been widely expected to keep rates steady at today's rates meeting, the first of 2011, after underlying inflation dipped to 2.2% - its lowest level in a decade - in the December quarter.
Treasurer Wayne Swan has warned that food prices will surge in the coming quarter as a result of the floods, which wiped out key farming regions and rocked the coal mining industry.
Stevens said the strong Australian dollar, which has traded near parity with the greenback for several months, was helping to temper inflation, along with moderating wage growth.
'The Bank expects that inflation over the year ahead will continue to be consistent with the 2-3% target,' Stevens said.
Australia, the first major western economy to raise interest rates after the global slump, has hiked its cash rate by 175 basis points since October 2009 as it rides a mining boom driven by Asian demand, helping it dodge recession.
