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Australian interest rates at a 12- year high “are essential'' to restrain inflation, which poses a greater threat to the economy than the global credit crunch, central bank Governor Glenn Stevens said.

“Inflation has picked up and needs, over time, to be reduced,'' Stevens said in a speech in Melbourne today. “There is not much uncertainty about the need for a moderation'' in domestic demand.

Central banks globally are sounding warnings as they seek to ensure record oil and food prices don't lead to broader price increases and demands for higher wages. Stevens' comments echo those of Federal Reserve Chairman Ben S. Bernanke, who said this week he'll “strongly resist'' any surge in inflation expectations, and European Central Bank President Jean-Claude Trichet, who said June 5 that he may raise rates in July.

Australia's central bank left the overnight cash rate target unchanged at 7.25 percent last week following increases in February and March. Stevens signaled on June 3 he is ready to raise rates again should growth not cool enough to damp prices.

High rates are needed “because inflation has already picked up'' and also “to head off further problems that could easily emerge given the expansionary effects of the terms of trade,'' Stevens said.

“This is why a tight monetary policy setting is essential,'' he said. “It is why the Reserve Bank has lifted interest rates, even as the Federal Reserve was reducing them.''

Bonds Decline

The two-year government bond climbed 14 basis points, or 0.13 percentage point, to 7.15 percent from yesterday. Australia's dollar rose to 94.02 U.S. cents at 3:07 p.m. in Sydney from 93.83 cents before the governor's comments.

“Stevens is defending the level of rates; and the Reserve Bank's tightening bias,'' said Matthew Johnson, senior economist at ICAP Australia Ltd online payday advance. in Sydney. “The central bank will not be dissuaded from lifting rates'' again, even as growth slows, should inflation pressures mount, Johnson said.

China's appetite for commodities has stoked an Australian mining boom that is extending the economy's 17-year expansion. That's driven unemployment to the lowest in more than three decades, and helped cushion the $1 trillion economy from fallout from the global credit crisis.

BHP Billiton Ltd. and other resources companies are expanding mines and oil fields, boosting demand for labor and adding to pressure on Australian inflation.

Underlying inflation accelerated to 4.4 percent in the first quarter, the fastest since 1991 and exceeding the central bank's 2 percent to 3 percent target.

Income Boost

Rising resource prices have boosted incomes and “occurred at a time when the productive capacity of the economy has already been stretched by the long expansion,'' Stevens said. “Hence, the prospect of inflation has presented a larger and more immediate danger to us than it has, thus far, to the U.S.''

Earnings from commodity exports will boost Australia's terms of trade, a measure of income from sales abroad, by 20 percent this year, the central bank forecasts.

There are signs higher borrowing costs are beginning to cool the domestic economy.

A report published yesterday showed employers cut jobs in May, ending a record 18 months of gains. Consumer confidence plunged to the lowest level in almost 16 years in June, home- loan approvals dropped for a third month in April, and businesses were pessimistic for a fifth month in May.

“Things are happening that suggest a moderation in growth in domestic demand is occurring,'' Stevens said.

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