Reserve Bank's official interest rate kept on hold at 4.75pc

LOW inflation and floods spare borrowers a rate rise for now, but prompt warning to expect series of hikes later in the year.

interest rates

LOW inflation and flooding in Queensland may have spared borrowers a February rate rise, but expect a series of hikes later in the year.

The Reserve Bank of Australia (RBA) today cited low inflation and the "temporary adverse effect'' of the Queensland floods on the nation's economy as reasons for keeping the cash rate at 4.75 per cent.

"Over the next year or two, the efforts to repair or replace infrastructure and housing will add modestly to aggregate demand, compared with what would otherwise likely have occurred,'' RBA governor Glenn Stevens said in a statement.

"The Bank's preliminary assessment is that the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation.''

He indicated that the RBA is comfortable with its current setting of monetary policy.

"Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008.

The Bank expects that inflation over the year ahead will continue to be consistent with the 2–3 per cent target."

The central bank last raised the cash rate in early November, from 4.5 per cent to its current 4.75 per cent.

JP Morgan economist Helen Kevans said she was not surprised by today's outcome.

The RBA's decision to leave rates unchanged today was widely expected with Australia's December quarter inflation rate remaining well outside the danger zone to trigger a rate hike.

The consumer price index - Australia’s key measure of inflation - rose 0.4 per cent during the period, well below expectations for a 0.8 per cent rise.

"We weren't too surprised by the (RBA's) statement,'' Ms Kevans said.

"The RBA did mention the impact of the Queensland floods and that's going to have an impact on prices.

"The medium term outlook for inflation is uncomfortably high.''

She said strong terms of trade over the course of the year would negate the negative economic impact of flooding along the nation's eastern sea board.

HSBC chief economist Paul Bloxham said it was unlikely the RBA would change rates while policy makers survey the economic damage of the floods across the nation's east coast.

"Setting rates involve looking forward at what is happening in the economy," Mr Bloxham said.

"The floods have increased uncertainty, we don't have any data that post dates the floods as yet and in that uncertain environment it isn't likely that the central bank would move interest rates."

He said if underlying inflationary pressures remain contained, the RBA could stay on the sidelines until well into 2011.

"The recent lower-than-expected inflation figure would surely make the RBA comfortable with the current setting of policy and we are probably not going to see it increase rates until May or June."

But while some experts and money markets now don't expect the RBA to move any time in the next few months, it will eventually have to act as inflationary pressures build over the medium-term.

The danger ahead lies in the extra demand that post-flood rebuilding - combined with the booming minerals and energy sector - will place on the economy and wages growth.

Ms Kevans said she expected inflation to rear its head in mid 2011, leading to a cash rate of 5.5 per cent by the end of the calendar year.

ANZ banks forecasts a 25-basis-point rise in the cash rate for the third quarter of 2011, and followed up in fourth quarter by another rise to take official interest rates to 5.25 per cent by the end of the year.

The bank is then tipping there will be another two 25-basis-point hikes in 2012, to take the cash rate to a peak of 5.75 per cent by the end of 2012.

RateCity forecasts at least one 25 basis point rise in 2011.

With AAP