* Q3 export prices jump 7.8%, import prices up 0.5%
* Asian-driven terms of trade boom fuels investment binge
* Inflation data next week important for Nov rate hike
By Wayne Cole
SYDNEY, Oct 22 (Reuters) -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 percent increase in export prices for the third quarter came on top of a huge 16.1 percent rise the previous quarter. In all, prices were up 27.7 percent in the year to September, boosting profits, investment, jobs and tax receipts.
This bonanza is the main reason the Reserve Bank of Australia (RBA) has warned that interest rates will have to rise again to control inflation, perhaps as soon as next month.
"This is real money that's washing through the economy and giving nominal GDP growth in double-digits," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"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."
See special report on Australian economy:
http://link.reuters.com/gas39p
The RBA has already hiked six times since October and the 4.5 percent 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 (CPI), due on Oct. 27. The central bank expects underlying inflation to run at an annual 2.5 to 2.75 percent in the third quarter, within its long-term target band of 2 to 3 percent.
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 percent 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.
"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 utilisation."
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 percent chance of a move
to 4.75 percent at the next meeting on November 2
A rise to 5.0 percent is priced in for the next 12 months, though most analysts think that understates the risk.
COUNTING ON ASIA
Australia's good fortune owes much to demand from Asia, which now takes over 70 percent of its exports and is growing much faster than Europe or the United States. Just this week China reported annual growth of 9.6 percent for the third quarter.
Friday's data showed prices for metal ore exports climbed 70 percent in the year to September, while coal rose 34 percent, gold 19 percent and gas 56 percent.
In contrast, import prices rose a modest 0.7 percent in the quarter and were down 1.5 percent for the year.
As a result Australia's terms of trade, or the ratio of export prices to import prices, climbed around 30 percent 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 A$11.1 billion between April and August.
(Editing by Mark Bendeich)