Rates expected to stay on hold - for now

THE Reserve Bank of Australia is expected to keep the official cash rate unchanged at 4.75 per cent when it meets today.

THE Reserve Bank of Australia is expected to keep interest rates on hold when it meets today.

Economists widely expect the RBA to keep the official cash rate unchanged at 4.75 per cent.

The central bank will today hold its first board meeting since December. On Friday, it will release its quarterly monetary policy statement.

This week also marks the first time Reserve Bank governor Glenn Stevens has had the chance to express his thoughts about the floods and what impact they will have on interest rates.

"The chances of a near-term rate hike were snuffed out, not only by the devastating floods, but by last week's ... (December quarter) CPI result,'' JP Morgan chief economist Stephen Walters said.

That showed both the annual rate of the consumer price index (CPI) and underlying measures of inflation were comfortably within the Reserve Bank's two to three per cent target zone.

"That said, we believe the RBA retains a tightening bias - the underlying story for RBA officials has not changed, so we still expect the next hike in May,'' Mr Walters said.

"While the flood-related food and energy price shocks will be temporary, they will be followed by broader-based wage and inflation pressure as the reconstruction gets under way.''

This will occur at the same time of elevated commodity prices, surging mining investment, and already low unemployment.

A more up-to-date reading of inflation released yesterday showed prices accelerated 0.4 per cent in January, led by a 12.1 per cent spike in the price of fruit and vegetables in the wake of the floods.

The annual rate of the TD Securities-Melbourne Institute monthly inflation gauge remained above the Reserve Bank's at 3.4 per cent, but down from 3.8 per cent in the year to December.

Treasury estimates that the impact of the floods will see a temporary spike in the CPI of about a quarter of a percentage point in the March quarter, while chopping half a percentage point from gross domestic product (GDP) in 2010/11.

Economists expect the Reserve Bank will make similar changes to its forecasts.

Other data released yesterday also suggested that the central bank won't be rushing to lift rates again any time soon after last year's four interest rate rises.

The RP Data-Rismark Hedonic home value index rose by a seasonally adjusted 0.4 per cent in the December quarter, including a mere 0.2 per cent rise in capital city prices, to be up 4.7 per cent over the year.

At the same time, credit growth rose by a slim 0.2 per cent in December, for an annual rate of 3.4 per cent, according to RBA data.

Housing loans again made up much of the credit growth in the month, with growth in business and other personal loans both declining.

"Today's credit data is further evidence for the RBA that there is no pressure to hike again in the near-term,'' National Australia Bank senior economist Spiros Papadopoulos said.

"Higher interest rates through 2010 have seen domestic demand ease and house price growth flatten, and subsequently household credit growth is trending lower.''