Global commodity prices are likely to remain elevated for an extended period and tighter monetary policy in regions including Asia may be needed to contain inflation, Reserve Bank of Australia official Philip Lowe said.
“What does seem clear is that the world economy is going through a change in relative prices, and that this change is likely to be quite persistent,” Lowe, an assistant governor, said in the text of a speech today in Sydney. “At least for the time being, it would appear that the ability of the world to produce commodities is becoming a key constraint on non- inflationary growth for the global economy.”
Lowe, who heads the central bank’s economics department, didn’t specifically address RBA monetary policy in his prepared remarks. He focused on the rise of commodities and signs of Australian consumer restraint -- both of which he said would have an “important bearing” on the nation’s economy in the next year.
Lowe said the rise in commodity prices is occurring at a time when many advanced economies are operating “well below full capacity” and with “very high” unemployment. That’s unusual, he said, because sluggish growth and weak demand in earlier economic cycles sent prices lower for raw materials.
“We are experiencing the co-existence of strong commodity prices and large output gaps in advanced economies,” Lowe said.
Some central banks in the Asia-Pacific region have already boosted borrowing costs this year to avert economic overheating. China raised rates for the third time in fourth months on Feb. 8, joining India, Indonesia, Thailand and South Korea in tightening.
A report two days ago showed China’s inflation exceeded the government’s 2011 target for a fourth month, escalating pressure on the central bank to keep raising rates.
An intensification of inflationary pressure in Asia would mean “a stronger policy response than seen to date would be likely, increasing the risk of a subsequent sharp slowdown in the region,” Lowe said.
He also reiterated the main forecasts for Australia’s economy released Feb. 4, adding that the destruction of crops in northeastern Australia by Cyclone Yasi this month would see a surge in fruit and vegetable prices that would push inflation to about 3 percent in the year through June.
The assistant governor said he expects a “strong rebound” in Australia’s gross domestic product in the second quarter and that the RBA assumes the nation’s savings rate -- 10.2 percent in the third quarter of 2010 -- will remain high.
“In putting together our forecasts, we have assumed a middle path, with the saving rate staying high, but consumption growth broadly matching income growth over the next couple of years,” Lowe said. “We will, of course, be looking very closely to see if this is how things evolve.”
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