FED:RBA head to be quizzed on disasters impact

AAP General News (Australia)
02-10-2011
FED:RBA head to be quizzed on disasters impact

By Colin Brinsden, AAP Economics Correspondent

CANBERRA, Feb 10 AAP - Glenn Stevens usually does his utmost to avoid becoming embroiled
in political debate.

But it may be difficult for the Reserve Bank governor to sidestep the row over the
federal government's flood rebuilding package, and particularly the proposed flood levy,
when he faces politicians on Friday.

He will have to dig deep for the appropriate wording from his central banker's lexicon.

The impact of this summer's natural disasters will dominate Mr Stevens and his economic
team's three-hour grilling in front of the House of Representatives economics committee
in Canberra.

"We are now seeing a big stimulus as a consequence of these events," deputy committee
chair and Liberal member for Moncrieff Steven Ciobo told AAP.

"Given that the Labor government is still providing even further fiscal stimulus, what
will the result be on interest rates?"

The central bank's quarterly monetary policy statement released last Friday, and only
days after the Cyclone Yasi hit far north Queensland, provided an initial assessment of
the impact of summer floods.

Inflation is expected to be lifted by a quarter of a percentage point in the March
quarter through higher fruit and vegetable prices, much of which will be reversed in the
following three months.

Treasury expects the cyclone will add a further quarter of a percentage point to inflation.

The central bank says when setting interest rates, it will "look through" these short-term
effects on the economy, as it has done when previous natural disasters have occurred.

Still, committee members will still be seeking to further draw Mr Stevens on the inflation
outlook and what it means for interest rates.

Financial markets are predicting another two interest rate increases this year, and
Mr Stevens will be quizzed on how that fits in with his expectation of inflation staying
within the central bank's two to three per cent target band in 2011.

Committee chair Craig Thomson says the economy already has a very tight labour market,
and now there is the post-disaster rebuilding program. He has questioned what sort of
effects these are going to have on inflation.

The Labor member for Dobell also wants to know the impact on households from the big
lift in interest rates last November.

"Everyone I talk to has been doing it pretty tough," he told AAP.

Mr Stevens will likely be quizzed on whether he agrees with Treasurer Wayne Swan's
comments this week that March quarter economic growth could post the first negative number
since the depths of the global financial crisis.

Macquarie Research divisional director Brian Redican believes a negative quarter of
growth is becoming increasingly likely, and as such he hopes the hearing questions the
central bank's extremely upbeat economic outlook for 2011.

In last Friday's statement, the Reserve Bank upgraded its annual growth forecast to
a robust 4.25 per cent by December, accelerating from a strong 3.25 per cent by June.

"You are looking at two per cent growth in the June quarter to get the Reserve Bank's
forecast back on track, that's quite an extraordinary rate," Mr Redican told AAP.

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