'Hot' China economy threatens Australian inflation

16/05/2008 16:59:59

Australia's top central banker says an overheated Chinese economy is affecting Australia's inflation rate.

A red hot Chinese economy is driving up the price of Australia's mining exports and boosting national income.

In an address at Sydney University, Reserve Bank chairman Glenn Stevens defended the bank's recent decision to raise interest rates, saying it was necessary to keep inflation within a narrow target band.

Audience members asked why rates were being increased if inflation was being driven by soaring global oil prices, over which the central bank has no control.

"That was precisely the thinking of the 1970s, that is how we got 10 per cent inflation by saying 'let's just live with it, it's a bit too hard to control it'," he replied.

Mr Stevens agreed the booming Chinese economy is making the Reserve Bank's task much tougher.

"China is probably, I would say at this point, overheating and needs to slow down, but I don't think there is any doubt that, short of some cataclysmic event, it is going to, on average, continue to grow pretty quickly," he said.

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