RBA's Kent Sees Limited Potential for Commodity Prices to Rise

  • Commodity Price Index still 80% above early-2000 levels
  • China has scope to provide further support to its economy

Australia is unlikely to see a significant increase in commodity prices as China’s altered development path damps demand, central bank Assistant Governor Christopher Kent said.

The Reserve Bank of Australia’s commodity price index is down 50 percent from its peak, though still 80 percent higher than its levels in early 2000, Kent said in the text of a speech in Sydney Tuesday.

“The changing nature of China’s development implies that the potential for commodity prices to rise from here is somewhat limited,” said Kent, who is chief economic adviser to RBA Governor Glenn Stevens. “While our comparative advantages in service industries are perhaps less obvious than they are for mineral resources, the rise in the demand for services from a large and increasingly wealthier populace in our region will no doubt be to our benefit.”

China’s leaders are seeking to transition from an investment-driven, manufacturing-dominated economy to a more consumption and services-led one in the next five years while maintaining growth of at least 6.5 percent a year. With the real estate sector stalling, manufacturing deteriorating, and inflation muted, policy makers there are under pressure to step up stimulus as new growth drivers aren’t picking up the slack quickly enough.

While the property and manufacturing weakness are “clearly of concern” to commodity exporters like Australia, Kent noted that China’s household consumption has been stable in recent quarters and policy makers have eased monetary policy and approved more infrastructure investment to keep the economy ticking over.

“They have scope to provide further support if needed, although they may be reticent to do too much if that compromises longer-term goals, such as placing the financial system on a more sustainable footing,” he said.

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