Interest rates could rise after flood crisis

AS Queenslanders count the cost of rising floodwaters, homeowners should prepare for the fallout.

The national flood crisis has all but guaranteed Australian interest rates will rise within months / Picture: Glenn Hampson

THE flood crisis threatens to aggravate Australia's pressure-cooker economy, fuelling inflation and all but guaranteeing a rise in interest rates.

And prices of imported goods are declining too slowly to counteract inflationary pressures entrenched even before floods struck in recent weeks, economists say.

Prominent HSBC economist Paul Bloxham yesterday increased his inflation forecast, warning of renewed wages pressure as Queensland in particular rebuilds.

His warning came as new data indicated that import prices were not falling fast enough to temper inflation despite the robust buying power of the Australian dollar in recent months.

The TD Securities-Melbourne Institute Monthly Inflation Gauge climbed 0.2 per cent in December, taking the annual figure to 3.8 per cent - down only slightly from 3.9 per cent in November.

Underlying inflation, which strips out volatile price movements, was 3.2 per cent in the year to December, exceeding the Reserve Bank's target range of 2 to 3 per cent.

Prices for audio, visual and computing equipment, sport and other recreational products and books, newspapers and magazines fell. But fuel, fruit and vegetables, holiday travel and accommodation prices all climbed.

TD Securities analyst Annette Beacher said that inflation was effectively being pushed higher "from all angles", confirming that the next move for interest rates "remains up".

The Queensland floods left inflation risks "firmly tilted to the upside, where the immediate fallout is a likely spike in food price inflation", she said.

Mr Bloxham, noting that Queensland accounted for almost a third of domestic fruit and vegetable production, said:

"Food prices will rise due to the floods...against the backdrop of food markets which were already pretty tight.

"The more important issue is that, with the labour market already around full employment, additional expenditure on reconstruction and repair will put further upward pressure on wages and thus inflation."

A former economist at the Reserve Bank, Mr Bloxham is maintaining that the RBA will lift official interest rates in the second quarter.

He expects it to rise 75 basis points, or 0.75 percentage points, this year, and 100 basis points by the end of the first quarter next year -- to 5.75 per cent.

Ms Beacher is expecting a May increase.

National Australia Bank economists yesterday predicated inflation, as measured by the consumer price index, would jump 0.75 percentage points above market expectations in the March quarter.