Interest rates...impact of floods?
- Thread starter mary&mat
- Start date
I find it best to look at what real money is saying
Everything else is a prediction attempting to outperform the market, which is a challenging thing to do on a consistent basis.
In the short term (ie 6 months view point) the answer is definately yes.
Longer than that time frame, the answer is much less uncertain, what one could see is the economic drag being a timing issue, where the short term drag is negative, put the cost of recovery adds to inflation pressures later down the road (eg rebuilding of infrastructure in a tight labour market and with competition from resource building infrastructure)
Longer than that time frame, the answer is much less uncertain, what one could see is the economic drag being a timing issue, where the short term drag is negative, put the cost of recovery adds to inflation pressures later down the road (eg rebuilding of infrastructure in a tight labour market and with competition from resource building infrastructure)
Costs will rise - fruit and veges will be come more expensive because of the loss of farms. Building materials and labour will be scarce and in demand and prices will inevitably rise. In the short term rents in Brisbane will rise as a result of increased demand. Road and rail damage mean transport costs on just about everything will increase.
These rising costs feed directly into the CPI index.
All of thise could lead to earlier interest rate rises in an attempt to dampen the effect of higher inflation.
Marg
These rising costs feed directly into the CPI index.
All of thise could lead to earlier interest rate rises in an attempt to dampen the effect of higher inflation.
Marg
Inflation is the big fear and the Reserve Bank, rightly or wrongly, uses interest rates to try to control it.
If cost rises feed into inflation increases, then interest rates will rise.
Queensland is only part of the Australian economy - the Reserve Bank sets the interest rates for the whole country.
Marg
If cost rises feed into inflation increases, then interest rates will rise.
Queensland is only part of the Australian economy - the Reserve Bank sets the interest rates for the whole country.
Marg
+++++++++++++++++++++++++++++++++++++++
Interest rates will rise. Not just due to the rising costs in Australia leading to higher inflation, but also inflation being exported from China, India, etc, as they also try and bring their inflation under control.
The RBA has a hard balancing act, with a slowing economy, but higher inflation. In the end, they will try and contain inflation. The annual inflation gauge rose by 3.8 per cent, the fifth consecutive month it has been at or above the 3 per cent upper band of the RBA's inflation target. They may hold in Feb, but will rise in March.
As bank interest rates head toward 8.5-9%, Australia property will slow further.
Inflation rise sparks fears of long-term spike
The RBA has a hard balancing act, with a slowing economy, but higher inflation. In the end, they will try and contain inflation. The annual inflation gauge rose by 3.8 per cent, the fifth consecutive month it has been at or above the 3 per cent upper band of the RBA's inflation target. They may hold in Feb, but will rise in March.
As bank interest rates head toward 8.5-9%, Australia property will slow further.
Inflation rise sparks fears of long-term spike
all the points you raise are definately valid from a longer term perspective.
Whether they will influence interest rates in the short term i am doubtful.
But longer term you are definately raising the issues that people should be looking at.
And with transaction costs and potentially illiquid markets i would say that property is a long term investment, thus consideration should be paid to the longer term rather than the short term.
Actually, though it appears high food prices etc will increase inflation & thereby trigger rate rises there is another view. The effect will be to take money out of the economy, thereby decreasing discretionary spending, thereby decreasing the need for the RBA to do anything. See this article from this morning's Business Age:
Floods Quench RBA motive to push rates up
Floods Quench RBA motive to push rates up
Was it a case that couldn't find an insurer to insure it, or didn't want to pay the extra?
I read that the owner of the Drift Restaurant on the Brisbane River tried 42 insurers and couldn't get insurance for floods. Now financially ruined.
This is definitely going to impact inflation in the short term, which already was pushing the RBA for a February rise:
http://www.heraldsun.com.au/business/australias-inflation-rate-on-the-rise/story-e6frfh4f-1225989515280
There is also the impact of stimulus from government disaster relief efforts.
On the flip side, the economic impact on Queenslanders will reduce their ability to spend and this may act as a stopper on inflation in the medium term, which seems to be how the money markets are reacting. The 90 day bill has actually dropped slightly this week despite higher than expected December inflation figures.
Cameron Perry
Perry Financial Strategies
www.perryfinance.com
http://www.heraldsun.com.au/business/australias-inflation-rate-on-the-rise/story-e6frfh4f-1225989515280
There is also the impact of stimulus from government disaster relief efforts.
On the flip side, the economic impact on Queenslanders will reduce their ability to spend and this may act as a stopper on inflation in the medium term, which seems to be how the money markets are reacting. The 90 day bill has actually dropped slightly this week despite higher than expected December inflation figures.
Cameron Perry
Perry Financial Strategies
www.perryfinance.com
^ Interesting comparison of journalism between the 2 papers, huh? Unsurprising to see the little paper running a headline with little analysis.
The RBA discounted the blip of the banana crisis, from memory. But I'm guessing they will be watching to see whether the infrastructure rebuilding leads to capacity constraints. This is what they'll be wary of - not price rises.
The RBA discounted the blip of the banana crisis, from memory. But I'm guessing they will be watching to see whether the infrastructure rebuilding leads to capacity constraints. This is what they'll be wary of - not price rises.
Very interesting Ms Jade. I hadn't read the article you linked to before posting. The Herald Sun article is short on analysis, but does represent a widespread school of thought that the floods will increase pressure on rates. Ian Verrender's article seems a bit contradictory, in that it states that the impact of the floods will placate the RBA, but will push up inflationary pressures in the medium term due to the reconstruction effort. I would have thought that the RBA will act in the short term if they are worried about medium term inflationary pressures, but we will see.
Cameron Perry
Perry Financial Strategies
www.perryfinance.com
Cameron Perry
Perry Financial Strategies
www.perryfinance.com
The house wasn't there in '74, but it is on stumps that were supposed to have brought it higher than the flood level. Just another metre higher and it would have been right.
I think I'm going against consensus here, but hey, what's new 
I think the next move the Reserve Bank makes up or down will be down.
If the ABS figures show a weakening of the housing market (and I expect they will) and/or there is concern about the economic impact of Brisbane this will worry the Reserve Bank. Actually the impost of the flood levy and government spending cuts may increase their worry and push them over the edge in that regard.
The mission of the Reserve Bank is the "stability of the currency". Unless they believe the high prices pose a threat to the stability of the currency (e.g. by causing wage inflation or heralding a currency collapse) whether Australians can afford to buy fruits and vegetables is not their problem. In fact it is entirely possible that high prices for fruits and vegetables may instead just cause Australians to stop eating out or refuse to pay any rental increases. Retailers spooked by bad sales figures (and afraid of bad PR) may simply eat the higher costs and not pass on the full rise until it gets to the point of them having no choice. This then raises other spectres such as unemployment and maintaining the prosperity and welfare of the Australian people but that's the sort of thing that leads to rate cuts not rises. The UK and US central bankers have been keeping interest rates ultra-low to prop up asset prices despite the effect this has been having on food and energy prices in those countries which just goes to show where central bankers' priorities lie when push comes to shove. Also as recent events have shown in the face of deflation, central banks have started throwing out even their sacred mission of preserving the stability of the currency as well. Deflation really scares central banks.
Also, to tell the truth I have my doubts as to how high price rises will go anyway. People are getting well prepared to accept water damaged fruit and vegetables. Also Brisbane's employment scene already had a fair amount of slack (especially the tradies) before the floods. Hence work for them to rebuild may not cause wages to increase that much. For example the Brisbane city council has decided to stop all non-recovery related projects. It is closer to the Keynesian ideas about stimulating an economy with slack in it which (if you got it right) shouldn't increase inflation too much, at least in the short to medium term (government debt in the long term is a different question). Then there is the effect of all the destruction of wealth which will probably make a lot of people feel poorer. Oh and the flood levy and cuts in government spending whose effects will be highly deflationary.
Also the whole the rebuilding will cause massive economic growth thing sounds a lot like the Broken Window Fallacy where it assumes breaking a window will cause economic growth because the owner will have to get someone to fix it. However this ignores the fact that the owner has lost a store of wealth and he cannot spend the money on things he would have otherwise bought so while the tradie made money, the economy as a whole is poorer. The only way they seem to be able to get the stimulate bit is by the technical trick of GDP not including the damage to the store of wealth. But technical tricks with counting is not going to make people living in real life actually feel any wealthier.
My main surprise is that I keep on seeing these experts in the media talk on about this when the Broken Window Fallacy is well known in economics. Especially since there is a recent example where it didn't work with the economic impact of the earthquake in NZ getting that country downgraded. However it is entirely possible that the Reserve banks may not actually buy the Broken Window fallacy.
So I'm going for stable and then interest rate cuts.
Of course just because the Reserve Bank cuts doesn't mean the actual interest rates the banks charge will be cut...
Of course it is also entirely possible the Reserve Bank will actually buy the Broken Window Fallacy and raise interest rates (hey all those other experts in the media seem to love it). I don't think that would be a good move though...
I think the next move the Reserve Bank makes up or down will be down.
If the ABS figures show a weakening of the housing market (and I expect they will) and/or there is concern about the economic impact of Brisbane this will worry the Reserve Bank. Actually the impost of the flood levy and government spending cuts may increase their worry and push them over the edge in that regard.
The mission of the Reserve Bank is the "stability of the currency". Unless they believe the high prices pose a threat to the stability of the currency (e.g. by causing wage inflation or heralding a currency collapse) whether Australians can afford to buy fruits and vegetables is not their problem. In fact it is entirely possible that high prices for fruits and vegetables may instead just cause Australians to stop eating out or refuse to pay any rental increases. Retailers spooked by bad sales figures (and afraid of bad PR) may simply eat the higher costs and not pass on the full rise until it gets to the point of them having no choice. This then raises other spectres such as unemployment and maintaining the prosperity and welfare of the Australian people but that's the sort of thing that leads to rate cuts not rises. The UK and US central bankers have been keeping interest rates ultra-low to prop up asset prices despite the effect this has been having on food and energy prices in those countries which just goes to show where central bankers' priorities lie when push comes to shove. Also as recent events have shown in the face of deflation, central banks have started throwing out even their sacred mission of preserving the stability of the currency as well. Deflation really scares central banks.
Also, to tell the truth I have my doubts as to how high price rises will go anyway. People are getting well prepared to accept water damaged fruit and vegetables. Also Brisbane's employment scene already had a fair amount of slack (especially the tradies) before the floods. Hence work for them to rebuild may not cause wages to increase that much. For example the Brisbane city council has decided to stop all non-recovery related projects. It is closer to the Keynesian ideas about stimulating an economy with slack in it which (if you got it right) shouldn't increase inflation too much, at least in the short to medium term (government debt in the long term is a different question). Then there is the effect of all the destruction of wealth which will probably make a lot of people feel poorer. Oh and the flood levy and cuts in government spending whose effects will be highly deflationary.
Also the whole the rebuilding will cause massive economic growth thing sounds a lot like the Broken Window Fallacy where it assumes breaking a window will cause economic growth because the owner will have to get someone to fix it. However this ignores the fact that the owner has lost a store of wealth and he cannot spend the money on things he would have otherwise bought so while the tradie made money, the economy as a whole is poorer. The only way they seem to be able to get the stimulate bit is by the technical trick of GDP not including the damage to the store of wealth. But technical tricks with counting is not going to make people living in real life actually feel any wealthier.
My main surprise is that I keep on seeing these experts in the media talk on about this when the Broken Window Fallacy is well known in economics. Especially since there is a recent example where it didn't work with the economic impact of the earthquake in NZ getting that country downgraded. However it is entirely possible that the Reserve banks may not actually buy the Broken Window fallacy.
So I'm going for stable and then interest rate cuts.
Of course just because the Reserve Bank cuts doesn't mean the actual interest rates the banks charge will be cut...
Of course it is also entirely possible the Reserve Bank will actually buy the Broken Window Fallacy and raise interest rates (hey all those other experts in the media seem to love it). I don't think that would be a good move though...
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