Inflation pressures could resurface if the Reserve Bank cuts rates prematurely, Opposition Leader Peter Dutton has warned amid fears the north Queensland floods could push up grocery prices.

The devastating floods, which have led to two deaths, have hit banana and sugar supplies and are expected to have a minor impact on prices.

Treasury estimates up to 20 per cent of Australia’s banana crop could be affected by the disaster, as damage to road networks hampers supply chains.

“We know that the flood-affected region accounts for about four per cent of agricultural production in Australia,” Treasurer Jim Chalmers told reporters on Tuesday.

“So you can see that there might be quite narrow but significant impacts on some goods like bananas and sugar, but we don’t expect the overall impact on inflation to be substantial in aggregate.”

It’s unlikely to play too heavily on the RBA board’s mind, with markets pricing in a nine-in-10 chance of a rate cut at its meeting next week.

Mr Dutton said RBA governor Michele Bullock’s independence should be respected but he would welcome rates relief for families and small businesses doing it tough.

“But that’s a decision for the Reserve Bank governor, and she shouldn’t feel pressured one way or the other, because you can cut rates and then find that they’ve been cut too early, and the Reserve Bank will have to increase rates later on,” he said.

The economic cost and hit to the federal budget from the floods are also worrying the government.

Initial estimates from Treasury reveal lost economic activity as a result of the floods will amount to a 0.1 per cent reduction in March-quarter gross domestic product, or output.

“That might not sound like a lot, but at a time when growth is not especially thick on the ground in our economy, that is not inconsequential,” Dr Chalmers said.

“Obviously, as we always see with these sorts of events, there’s typically a bounce back in subsequent quarters, which comes from the rebuilding effort.

“But in the context of an economy, which is already quite soft, another 0.1 per cent of activity in the quarter we’re in now will make a difference.”

Australia’s economy grew at a subdued 0.3 per cent in the September quarter and 0.8 per cent over the year, which was the lowest annual growth rate in decades.

Dr Chalmers promised a “serious financial commitment” to help flood-hit communities recover and rebuild.

While the hit to growth will be felt in the national economy, the localised nature of the flooding means it should not have a major impact on consumer confidence levels.

The Westpac-Melbourne Institute consumer sentiment index edged up 0.1 per cent to 92.2 points in February, stalling a material recovery in consumer mood over the second half of 2024, Westpac head of Australian macro-forecasting Matthew Hassan said.

Consumers remain cautious, with household finances still stretched, but there’s rising optimism about the prospects for family finances given increased confidence about interest rate cuts.

“Overall, the mix suggests there may have been a larger than normal financial ‘hangover’ from the Christmas period and that many are still struggling with cost-of-living problems,” Mr Hassan said.

Meanwhile, business confidence was back in positive territory, firming by six points to four on NAB’s January index.

That came despite a softening in business conditions, with respondents experiencing a decline in trading and profitability.

The survey showed growth in the economy remained soft and a rebound in household spending would need to be maintained before conditions recover more broadly, said NAB economists Michelle Shi and Gareth Spence.

Jacob Shteyman
(Australian Associated Press)