Australia to get long-lasting boost from China
Updated: 2008-03-14 09:06
Australia's top central banker said he sees the rise of China as a long-lasting event that will be more important, and more expansionary, for Australia's economy than perhaps that of any other country.
In a speech given to the Treasury on March 11 but not released until Friday, Reserve Bank of Australia Governor Glenn Stevens said China's demand for commodities had delivered a huge boost to Australia's terms of trade -- what it gets for its resource exports compared to what it pays from imports.
"In essence, we are seeing a very large change in relative prices in the world economy, and a relative price change that is more important to Australia, in particular, than to almost any other country," said Stevens.
"Because the event is, overall, very expansionary, it was always likely to be associated with some risk of higher inflation," he added.
Stevens said all the indications were that the rise of China was not just a cyclical event, but a structural change of the first order.
"The rise of China is not a flash in the pan of economic history," he said.
Yet he argued that, so far, Australia had coped well with new-found wealth that China had brought.
"When all is said and done, the economy has coped pretty well so far," said Stevens. "Yes, inflation has risen. This is a problem, and requires a suitable response from monetary policy."
But compared with past terms of trade shocks the rise in consumer price index (CPI) so far was reasonable.
"This time, we are grappling with a peak CPI inflation rate that looks like it will be around 4 percent in CPI terms, and trying to assess how soon it can reasonably return to 2-3 percent," said Stevens. "This is a far cry from the problems of yesteryear."
Consumer price inflation rose at a 3.0 percent annual pace in the last quarter of 2007 but is widely expected to jump to around 4.0 percent this quarter as past distortions to prices fall out of the calculation.
Stevens strongly defended the central bank's policy of raising interest rates to control inflation, refuting criticisms that monetary policy was ineffective, too blunt or merely adding to the problem.
Last week the central bank lifted rates to a 12-year peak of 7.25 percent, the fourth hike since August.
He also dismissed claims that inflation was being driven by just a few price rises outside the control of monetary policy.