Speaking in London early Thursday morning, our time (http://www.rba.gov.au/speeches/2011/sp-gov-100311.html) he said Australia’s job in coming years is to "try to manage the terms of trade and investment booms."
"Historically, Australia has often not managed periods of prosperity conferred on us by global trends terribly well.
"On this occasion, we have to do better.
"We have to take the opportunity to capitalise effectively on some very powerful trends in the global economy to which we are, almost uniquely, positively exposed
"Australia sits in an interesting position here. Like our Asian neighbours we were affected by the events of late 2008.
"But the downturn was fairly brief.
"We were in a position to apply a liberal dose of stimulus to the economy, which was done in a timely fashion.
"The banks remained in good shape. Hence recovery began in the first half of 2009. A strong Asian recovery has also helped Australia.
"As in other developed countries our consumers feel the effects of higher commodity prices as a reduction in real income.
"But since Australia is also a producer, the big rise in demand for energy, resources and food is expansionary for the economy. In fact, with our terms of trade at by far their highest level, on a five-year average basis, in more than a century, these events are very expansionary indeed.
"A very large increase in investment in the resources sector is under way and has a good deal further to run yet.
"Just recently, we have been experiencing growth close to trend, relatively low unemployment – about 5 per cent – and moderate inflation, about 2¼ per cent in underlying terms.
"In comparison with the experience of the past generation, that is a pretty good combination.
"A few things are working in our favour.
"One is that the exchange rate is playing a role of helping the economy to adjust to the change in the terms of trade in a way that it was prevented from doing on numerous previous occasions.
"Another is that, at least so far, households are behaving with a degree of caution, insofar as spending and borrowing are concerned, that we have not seen for a long time.
"Having taken on quite a degree of debt over the preceding 15 years or so, households have thought better of taking on too much more.
"They are saving more than at any time for 20 years or more.
"So are households in many other countries, of course, but our good fortune is to be making that adjustment against a backdrop of rising income.
"We are now engaged in a national discussion about how to stretch the benefits of the resources boom over a long period, and how to manage the risks that it will bring.
"These are complex matters that involve a wide range of policy areas – macroeconomic, microeconomic, taxation, industrial and so on.
"But if that discussion can be conducted in a mature fashion, and followed up with sensible policies, then we have a good chance of leaving to the next generation a wealthier, more secure and more stable Australian economy."
Earlier in Sydney, Philip Lowe, the RBA’s Assistant Governor, Economics reminded a meeting of the Australian Industry Group that the near-record terms of trade are fuelling a boom in investment and profits, boosting investment, making it easier for firms to hire staff, and boosting wages.
He said the terms of trade were around 90%, and while it was good to be cautious about how long this situation would last, he went on to say
"However, given that it is being driven by structural changes in the global economy, it is likely that commodity prices will be above their average over recent decades for some time yet," said Lowe.
"If this is the case, Australia will do very well."
The improvement in our terms of trade faces a further boost with coking coal price settlements for the June quarter now hitting an all time high of $A330 a tonne, up 40% and iron ore contract prices for the same period up 20% at close to $US180 a tonne.
In fact there’s a very real chance that these ultra high prices could persist for another quarter or two while stocks of coking coal and iron ore are replenished because they have been rundown as steelmakers drew them down during the Queensland floods and other supply disruptions from brazil.
On top of that Indian iron ore export taxes are being quadrupled, meaning the chances of a price fall for iron ore contracts later in the year has diminished somewhat.
Mr Lowe said the boom is generating growing investment in mining, especially iron ore and oil and gas.
But he warned his audience that since there was little overall spare capacity in the economy not all sectors would be able to grow rapidly.
Some, like tourism and manufacturing, would likely have to settle for below-trend growth as the structure of the economy changed. Tourism has been already hit by the fall in incoming visitors, and the rise in the number of Australians travelling overseas as incomes rise and the dollar makes it cheaper.
Mr Lowe said the latest survey of businesses suggested investment spending by miners could rise by 50% in 2010-11,
