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Lowe Sees High Commodity Prices, Asia Rate Pressure

Feb. 17 (Bloomberg) -- Global commodity prices are likely to remain elevated for an extended period and tighter monetary policy in 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 and higher savings -- both of which he said would have an “important bearing” on the nation’s economy in the next year.

The Thomson Reuters/Jefferies CRB Index of 19 raw materials has increase for five straight months and is about 24 percent higher than a year earlier, reflecting rising prices for commodities including corn, crude oil and copper.

For Australia, an exporter of iron ore and coal mined mostly from states in the country’s north and west, trade is helping propel growth even as consumers hunker down.

‘Extraordinarily High’

“The prices at which we are selling Australian resources to the world are extraordinarily high and that is generating a lot of domestic income,” Lowe said. “And income effects flow right through the economy, not just in Queensland and Western Australia.”

The Australian dollar was little changed, trading at $1.0037 at 11:21 a.m. in Sydney from $1.0031 before the speech.

RBA Governor Glenn Stevens earlier this month held the benchmark rate at 4.75 percent for a second straight meeting after a quarter percentage-point rise in November. In testimony to a parliamentary panel last week, Stevens signaled little urgency about raising rates in the near term.

“We’re ahead of the game, which is where you want to be, and that’s the thing that affords you periods of sitting, waiting and watching,” he told lawmakers in Canberra on Feb. 11. “Sometimes, they can be reasonably lengthy periods.”

Lowe said today 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.

Rate Increases

Some central banks in the Asia-Pacific region have already boosted borrowing costs this year to avert economic overheating. China has raised rates three times since mid-October, 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, repeating Stevens’s comments to lawmakers Feb. 11. 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 and cut gross domestic product by about 1 percentage point in the first quarter, Lowe said.

GDP Outlook

The assistant governor said today he expects a “strong rebound” in Australia’s GDP 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.

“The economy is operating fairly close to full capacity. The unemployment rate is pretty close to full employment,” Lowe said in response to questions from the audience after his speech. “If we’re going to go through a period of very rapid increase in investment, which I think we are, then other parts of the economy are inevitably going to grow less quickly because it’s not like there are a lot of spare resources.”

Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney, forecasts the next RBA rate increase will happen in May. The key question “is how the tug of war between very robust income growth from the terms of trade and a greater leakage into saving will resolve itself,” he wrote in an e-mailed report after Lowe’s speech.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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