Impact of floods keeps interest rates on hold

The Reserve Bank of Australia kept its benchmark interest rate unchanged as the economy slows and policy makers gauge the impact on growth and prices of floods across the nation's east coast.

Governor Glenn Stevens left the overnight cash rate target at 4.75 per cent in Sydney, as forecast by all 22 economists surveyed by Bloomberg News. The inundation of Queensland and the southern state of Victoria is expected to add 0.25 percentage point to inflation this quarter and cut 0.5 point from gross domestic product, Treasurer Wayne Swan said last week.

The RBA has paused for two straight meetings after raising rates seven times from October 2009 to November last year, curbing the local currency's rally last year against the US dollar.

Policy makers are forecast to hold borrowing costs unchanged in coming months because inflation slowed last quarter and households are saving more, even as a mining boom stokes employment.

"Not even inflation-focused RBA officials would hike with much of Queensland still in ruins," Stephen Walters, chief economist for Australia at JPMorgan Chase in Sydney, wrote adding: "Inflation is well-behaved."

Traders are betting there is a 12 per cent chance Stevens will raise rates by a quarter percentage point to 5 per cent by June, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

The Australian dollar has fallen 2.2 per cent this year, the second-worst performer among the 16 major currencies tracked by Bloomberg, as investors reduced bets the central bank will raise rates in the short term to contain inflation.

Reports yesterday showed business confidence plunged to a 19-month low in December as the floods started damaging Queensland's mining, transport, agriculture and tourism industries, while house prices in the nation's eight major cities unexpectedly rose by 0.7 per cent in the fourth quarter.

Even before the floods, there were signs higher borrowing costs were damping expansion.

A central bank report on Monday showed loans provided by Australian banks and finance companies rose 0.2 per cent in December from the previous month, less than economists forecast.

Lending to companies dropped 0.3 per cent from November, the sixth straight monthly decline.

The RBA's next economic forecasts are to be released on February 4.

Australia's economy slowed in the third quarter, with GDP increasing at a 0.2 per cent quarterly rate, the weakest pace since a contraction at the end of 2008.

Employers added 2300 jobs in December, capping a record year of job growth with the smallest increase since February.

A Government report last week showed Australian consumer prices advanced 0.4 per cent in the final three months of last year from the previous quarter, the slowest pace in almost two years. From a year earlier, prices were up 2.7 per cent. That's within the RBA's target range of 2 per cent to 3 per cent on average.

Still, the flooding is clouding the outlook for Australian borrowing costs.

Torrential rains in Queensland state killed as many as 32 people, affected about 30,000 properties, shut coal mines, cut rail lines and damaged crops.

Woolworths, Australia's biggest retailer, last week cut its full-year profit forecast, citing lower consumer confidence and "uncertainty" over inflation and interest rates.

Some economists estimate as much as A$20 billion ($25.8 billion) in repairs and rebuilding.

The costs jeopardised the Government's goal of meeting a November forecast for a A$3.1 billion surplus in the year ending June 30, 2013.

Throughout the disaster, Prime Minister Julia Gillard has repeated a pledge to eliminate the deficit by that time.

The Government wants to apply a levy of 0.5 per cent on income between A$50,001 and A$100,000 and a 1 per cent rate applied on taxable income above A$100,000 that will raise about A$1.8 billion.

Finding workers for the reconstruction in Queensland, as well as the flood-damaged Victoria and New South Wales states, may become increasingly difficult in an economy where the labour market is already stretched.

Two coal-seam gas projects, expected to cost more than A$30 billion, are proceeding near the Queensland port of Gladstone.

Santos, Australia's third-largest oil producer, and BG Group, Britain's third-biggest gas producer, will start hiring the first of more than 10,000 construction workers needed for the two projects later this year.

- BLOOMBERG