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RBA confident about China, commodities

Business

A Reserve Bank official is confident that the worst is over for commodity prices and Australia will continue to benefit from a strong Chinese economy.

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Prices for iron ore, Australia’s biggest export, have fallen by about two thirds in past two years after reaching highs of about $US180 a tonne at the peak of the mining boom.

But RBA assistant governor for economics Christopher Kent said commodity prices are still quite high.

“One of the reasons why commodity prices now are much higher than they had been is because demand has expanded over many many years,” he told a UBS conference on Tuesday.

“So you’d need a really big retraction in demand to bring us back to those levels.”

Kent said a further substantial fall in commodity prices is possible, but another large drop in demand is unlikely.

But if commodity prices were to fall further the Australian dollar would also drop, which would help the local economy adjust.

Kent said an additional benefit for Australia is the other opportunities it has to export to China, particularly in services.

“Growth in the services sector has been resilient, and should continue to be assisted by a shift in demand toward services as incomes rise,” he said.

“Growth in household consumption has also been stable in recent quarters aided by the growth of new jobs.”

UBS economist Donna Kwok said as China’s middle class grows, so will the demand for services and goods that Australia is in a good place to provide.

“We’re starting to see a lot of appetite for Australian beef, dairy products, high end consumer products,” she said.

“As incomes tend to increase they will be more and more selective about the types of financial advisory services and healthcare services, and business logistics services.”

Kwok said entertainment is also another area of potential expansion, particularly online.

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