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Can rising commodity prices make global central banks rethink their policy?

If commodities continue to trade higher, inflation concerns may strengthen further, fueling debate about how long central banks can continue with loose monetary policies

May 08, 2021 / 03:53 PM IST

Commodities, in general, are in an uptrend on the hopes that demand may remain strong on the back of global economic recovery.

Outlook for the US economy has improved amid progress on the vaccination front and some stability in number of reported daily cases. This has led some states to ease virus-related restrictions. Some European nations are also working on easing travel-related restrictions.

Bank of England raised its GDP growth forecast for 2021 from 5 percent to 7.25 percent.

Further reflecting strong demand for commodities, China's imports surged 43.1 percent in April from a year earlier, the fastest gain since January 2011. Another support for commodities is weakness in the US dollar index. The US dollar has witnessed choppy trade in the last few days as market players assess the possibility of monetary tightening by US Fed, however, mixed economic data and mixed comments from US Fed officials eased worries that support measures may be withdrawn soon.

Riding high on demand optimism, LME Copper price recently jumped to record high levels above $10,200 per tonne; crude oil resumed its upward momentum and tested the highest level since March.

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Gold, which was struggling in a range for the last few days, also breached the coveted $1,800 per troy ounce level as the US dollar weakened and market players played down monetary tightening possibility.

Similar up move is also visible in agri commodities which are trading near multi-month highs. With rising commodity prices, world food prices increased for 11th consecutive month in April, hitting their highest level since May 2014, the United Nations food agency said on Thursday.

The Food and Agriculture Organization's food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 120.9 points last month versus a revised 118.9 in March. While rising commodity prices have fueled inflation concerns, major central banks have played down the risks so far, however, there are signs of dissent.

US Fed officials have maintained that while the economy is recovering fast it is still too soon to withdraw stimulus measures. However, Dallas Fed Robert Kaplan said he wants the central bank to start talking about reducing policy accommodation sooner rather than later. Bank of England also held its interest rate and total bond purchases unchanged but slowed the pace of weekly purchases.

If commodities continue to trade higher, inflation concerns may strengthen further, fueling debate about how long central banks can continue with loose monetary policies. Meanwhile, higher prices could also dent demand from China which is usually a bargain buyer.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: May 8, 2021 03:53 pm

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