Prices for Australia’s key commodity exports continued to tumble in January.
The latest commodity price index from the Reserve Bank of Australia fell by 2.9% in special drawing rights terms (SDR), largely in response to weakness in iron ore and oil prices.
The decline, following a 3.85% fall in December, left the index down 25.8% from 12 months earlier.
From its all time peak of 138.2, struck in July 2011, the index has now fallen by 56% in SDR terms. It now sits at the lowest level seen since October 2005.
The chart below, supplied by the RBA, reveals the scale of the decline seen over the past five years. Including January 2014, the index has now fallen in 23 of the past 25 months.
Thanks to the lower Australian dollar, the index priced in local currency terms was flat in January, leaving the annual decline at 17.2%.
Essentially, while the Australian dollar has fallen, the prices for Australia’s key commodity exports have declined by an even greater amount.
During the RBA’s last monetary policy meeting on December 1, governor Glenn Stevens noted that “key commodity prices (were) much lower than a year ago, reflecting increased supply, including from Australia, as well as weaker demand”.
He also noted that the Australian dollar was still “adjusting to the significant declines in key commodity prices”.
Since that meeting the commodity price index has fallen by 5% in local currency terms. By comparison, the Australian dollar, in trade-weighted terms, fell by a significantly smaller 0.5%.
While there is next to no chance the RBA will cut the cash rate when it meets on Tuesday for the first time this year, the divergence between commodity prices and the Australian dollar could see the RBA talk up the need for a lower currency with February’s monetary policy statement, released alongside the rate decision.