Floods hit RBA with new inflation shock

Flooding poses threat to food prices as the Reserve Bank weighs a 0.5 per cent point rate rise to tame rising inflation.

Lifesavers embedded with the State Emergency Service rescue a child as floodwaters swamp Penrith in Sydney’s west on Monday. Picture: NSW SES

The NSW floods disaster has ­endangered $1bn in produce, threatening a new shock to food prices as the Reserve Bank weighs a 0.5 per cent point rise in official interest rates on Tuesday to tame rising inflation.

As farmers warned that the latest floods in Sydney’s agricultural basin would keep the price of vegetables high for weeks, on top of elevated energy and fuel costs, new economic figures showed the jobs and housing markets ­remained robust.

The new data sparked predictions from leading economists that the Reserve Bank would opt for another double rate hike, taking the official cash rate to 1.35 per cent from its record low of 0.1 per cent in May, in what would be the steepest increase since 1994.

Financial comparison specialists Rate City said a 50 basis-point increase would lead to a rise in ­repayments over the quarter of $500 a month on a loan of $750,000 and $655 on a $1m loan.

The third flood emergency to hit northwest Sydney this year forced at least 30,000 residents to flee their homes. Some evacuations continued overnight as flood warnings remained in place for the Nepean and Hawkesbury ­rivers.

NSW lifesavers embedded with the NSW SES assist with a flood rescue in Penrith. Picture: NSW SES

Major flooding was occurring at Windsor, with river levels surpassing March 2021 and March 2022 levels. Other major flooding was hitting North Richmond, Menangle and Wallacia.

More than 200 Australian Defence Force personnel were deployed to assist in rescues, including some in armoured Bushmaster vehicles that arrived in McGraths Hill in northwestern Sydney to help residents trapped in their homes.

An operation to save a stricken cargo vessel in wild seas off the coast of the Royal National Park appeared to have succeeded by Monday evening, following fears the ship could have caused a major ecological disaster if it were to run aground.

The Bureau of Meteorology said on Monday night that 152mm of rain had fallen over the Sydney area since 9am on Monday.

The heavy rain was likely to move north by Tuesday. A severe weather warning was issued for Sydney, Illawarra and parts of the Hunter and Central Tablelands, with damaging winds and heavy rainfall predicted.

The NSW Government was expected to declare a natural disaster that would trigger a range of relief measures such as individual payments and infrastructure repairs. However Emergency Management Minister Murray Watt said the floods would not be declared a national emergency at this stage.

Sydney’s Warragamba Dam was overflowing on Monday but the spill rate had fallen to 240 gigalitres per day, less than half of Sunday’s high of 515 GL/day.

NSW Farmers Association President James Jackson said the agricultural value of the Sydney city basin affected by the floods was about $1bn and the price of leafy vegetables including lettuce would remain elevated.

Produce prices are expected to remain elevated. Picture: NCA NewsWire / David Mariuz

“It has got a small geographic footprint, but quite a lot of value comes out of it,” Mr Jackson said.

“There’s a lot of horticulture crop and small growers.”

Mr Jackson said he was receiving reports from canola growers that they had lost between $50,000 and $100,000 worth of seed. “The city basin and central west are getting an absolute towelling … There’s a lot of crop damage,” he said.

“Fences that have been half put back up (after the last flood) are being knocked down again.”

“It’s a perfect storm if you like. There are the overseas factors that have raised the price of fuel, fertiliser and logistics costs, but on top of that there’s the labour … The chickens are coming home to roost with the lack of labour.”

Mr Jackson said that after being hit by natural disasters three times this year and four times in 18 months, people on flood plains would be “reassessing their options” and whether to continue in the industry.

Ahead of the RBA board meeting on Tuesday, which will debate a rate rise, independent economist Saul Eslake argued that Australia’s economic fundamentals remained strong.

He noted that new ABS data showing home loan commitments had increased in May by 1.7 per cent to $32.4bn despite the Reserve Bank lifting the cash rate from its record low of 0.1 per cent that same month.

Australian Bureau of Statistics data revealed the total number of dwellings approved rose 9.9 per cent in seasonally adjusted terms in May, following a 3.9 per cent fall in April, despite approvals for private sector houses falling 2.7 per cent.

If the central bank increases the official rate by 50 basis points on Tuesday it will be for the ­second consecutive month following its initial 25 basis-point ­increase in May during the election ­campaign.

Mr Eslake forecast that the bank would lift the official cash rate to about 2.5 per cent by the end of the year and that there would be an economic slowdown over 2023.

He estimated growth of about 2 per cent over 2023 while NAB Group chief economist Alan Oster said it could be 1.8 per cent if the situation in the US ­deteriorated.

This represents a significant downgrading on the 4 per cent forecast in the former Coalition government’s March budget.

ANZ senior economist Catherine Birch said she was expecting a 50 basis-point hike from the RBA on Tuesday, arguing the central bank would need to move aggressively following the strong labour market data for May and last week’s figures showing job vacancies rose by 14 per cent to 480,000 over the three months to May.

On Monday, ANZ data showed job advertisements ­increased by 1.4 per cent in June compared with the previous month, exceeding the peak in March. Ms Birch said the result came despite employment increasing by 60,600 in May.

“Growth in demand for labour is still outpacing supply,” she said.

Ms Birch forecast the economy would be “pretty resilient to higher rates in inflation”.

Barrenjoey chief economist Jo Masters said she was forecasting GDP to slow to about 1.9 per cent next year but was not anticipating a recession, saying there were key offsets in Australia including the strong labour market and household savings buffer.

Mr Eslake said Australia still had a good chance of avoiding the same fate as America should the US entered a recession.

“I’m not forecasting a recession in Australia. But the chance is not zero. The chance might be as high as 25 per cent.”

Additional reporting: Sarah Ison