Resources to prop up economy: Report

The Australian dollar is expected to stay above 90 US cents throughout 2011 as the Reserve Bank continues to raise interest rates.

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Australia’s resource sector is also tipped to prop up the domestic economy, replacing stimulus spending as a key driver of growth.

The “high-flying” Australian dollar should stay well supported for a while longer, Access Economics said in its latest Business Outlook report.

The forecaster’s director Chris Richardson said he envisaged the Australian dollar staying above 90 US cents throughout 2011, but not going much beyond parity.

“We face roughly a year with the dollar being strong,” he told AAP.

Rates tipped to rise, resources vital

The Reserve Bank is also tipped to keep raising interest rates next year as wage costs put pressure on inflation.

“Australia’s economy continues to dance to the beat of a different drum, and continuing good economic news and the coming inflection in inflation are likely to see the Reserve Bank raising rates again,” the report said.

The cash rate was tipped to climb from 4.5 per cent at present to 6 per cent by the end of 2011, with the central bank tipped to raise the cash rate at least once before Christmas.

The report said business investment in the resources sector would be “absolutely vital” to Australia’s economic recovery, replacing public stimulus spending as a growth driver.

“We need to see the likes of the Gorgon project and other resource spending take the baton of growth from the construction of school halls,” it said.

This would offset sluggishness in the retail and housing construction sectors, the report said.

By the end of next year, Australia’s terms of trade was expected to fall as a greater global supply of resources caused commodity prices to “return to earth.”

Currency to fall

The central banks of other advanced nations, including the US, would also start to lift interest rates.

This would diminish Australia’s interest rate differential with other advanced economies and see the local currency fall off its highs, Mr Richardson said.

When it came to politics, Access Economics had misgivings about a minority government offering “a bucket of bribes” to the regions and promoting populist economic policies.

“They’re not going to risk political capital going for the right thing,” Mr Richardson said.

He cited shadow treasurer Joe Hockey’s call to regulate bank interest rates as an example of irresponsible politics, and urged the government to refrain from erecting new trade barriers, subsidising old industries and reaching for regulation without checking if its costs outweighed benefits.

“And don’t chase the chimera of `supporting jobs’ in an economy that is already close to full employment,” Access said.

Access Economics is expecting consumer price index data for the September quarter to show an annual growth of 2.9 per cent and a quarterly pace of 0.75 per cent, when the figures are released on Wednesday.