RBA revises up terms of trade forecast

Greater than expected increases in commodity prices, including agricultural prices,
has led the Reserve Bank of Australia (RBA) to upwardly revise its forecast for the
country's terms of trade.
"While the terms of trade are expected to decline over the medium term, the recent
strength in both resources and agricultural prices has led to an upward revision to
the bank's forecasts for the terms of trade over the next couple of years," the RBA
said in its quarterly Statement on Monetary Policy, released on Friday.
That would "continue to support domestic incomes," the RBA said.
The terms of trade is the ratio of the prices Australia receives for its exports to
the prices it pays for its imports.
The RBA said the terms of trade had probably reached the highest level since at
least Federation in 1901, with the spot prices of bulk commodities, such as iron ore
and coal, rising by five to 10 per cent in recent months on the back of Asian
demand.
The RBA's index of commodity prices had risen a little since August to around the
previous peak of September 2008, and was 55 per cent higher than the trough of mid
2009.
There was a particularly large increase in iron ore prices, although base metals,
crude oil, gold, as well as agricultural commodities had also gained
That in turn continued to underpin a positive outlook for investment, with
indicators showing very strong investment intentions among resource companies and a
large pipeline of work.
"There is expected to be a ramp-up in mining investment to a historically very high
level," the RBA said.
That included large liquefied natural gas (LNG) projects taking place in Queensland
and Western Australia as well as planned iron ore, coal and other LNG projects at
various stages of planning.



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