Reuters reported that Australia's export prices have surged for a second straight quarter as Asian demand fuelled huge increases for iron ore and coal, showering the economy in cash and illustrating just why interest rates are heading higher.
The 7.8% increase in export prices for the third quarter came on top of a huge 16.1% rise the previous quarter. In all, prices were up 27.7% in the year to September 2010, boosting profits, investment jobs and tax receipts. This bonanza is the main reason the Reserve Bank of Australia has warned that interest rates will have to rise again to control inflation, perhaps as soon as next month.
Mr Su Lin Ong senior economist at RBC Capital Markets said that "This is real money that's washing through the economy and giving nominal GDP growth in double digits. It's the sort of positive income shock that policy-makers ignore at their peril and it's why rates are likely to rise sooner rather than later."
The RBA has already hiked six times since October and the 4.5% cash rate is far above most other developed nations, some of which are considering easing policy further to support flagging domestic demand. Much might depend on consumer price figures, due on October 27th 2010. The central bank expects underlying inflation to run at an annual 2.5% to 2.75% in the third quarter, within its long term target band of 2% to 3%.
Such an outcome could allow a further pause on rates in November, but to forward looking policy makers the problem will be keeping prices tethered when they expect economic growth to accelerate to 4% over the next couple of years. Minutes of the central bank's policy meeting this month showed board members were well aware of the challenge.
RBA said that "Members concluded that interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening in resource utilization."
The only question was timing, with some feeling the rise of the local dollar to 28 year highs was a form of tightening that offered space to wait a while before lifting rates. Investors are pricing in around a 40% chance of a move to 4.75% at the next meeting on November 2nd 2010 and a near 60% chance of a hike in December 2010.
A rise to 5% is priced in for the next 12 months, though most analysts think that understates the risk. Australia's good fortune owes much to demand from Asia, which now takes over 70% of its exports and is growing much faster than Europe or the United States. Just this week China reported annual growth of 9.6% for the third quarter.
The data showed prices for metal ore exports climbed 70% in the year to September 2010, while coal rose by 34%, gold 19% and gas 56%. In contrast, import prices rose a modest 0.7% in the quarter and were down 1.5% for the year.
As a result Australia's terms of trade, or the ratio of export prices to import prices, climbed around 30% in the year to September, the biggest rise in three decades. The surge has reversed the country's perennial trade deficit, delivering a cumulative surplus of AUD 11.1 billion between April and August 2010.
(Sourced from www.reuters.com)
