With domestic demand in Australia growing at over 5 per cent in 2002/03 and 2003/04, which is well above long-term potential, and with the economy approaching full capacity in a number of sectors, the extra domestic demand generated by the exceptional rises in the terms of trade could well have had serious inflationary consequences if it had continued.
This was particularly so as important prices such as those for oil, steel, plastics, shipping and other inputs to production were rising rapidly around the world. It was these types of concerns that led the Bank to raise interest rates a little further earlier this year.