Mining to drive economy in 2011, push rates up 1%

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Borrowers may have been spared an RBA rate rise before Christmas, but we may be paying another 1% more for our mortgages by this time next year, according to a new economic report.
 
Citibank’s report, Prospects for Economies and Financial Markets in 2011 and Beyond, predicts the Australian mortgage interest rates will be 100 basis points (1%) higher by the time 2011 comes to a close.
 
“Australia is one of the most leveraged developed economies to the continuing industrialisation and urbanisation of Asia,” explained Paul Brennan, co-head of Economic & Market Analysis at Citi in Australia.
 
“Exports to China, India and Korea represent about one-third of total exports and about 61% of gross domestic product (GDP), while exports to all of Asia, excluding Japan, represent 14% of GDP. Moreover, the terms of trade is at its highest level since the middle of last century.”
 
As a result, Brennan says that over the next few years we can expect mining investment to increase in the order of 2-3% of GDP, led by investment in gas, coals and iron ore.
 
“This will push economic growth above trend and widen the current account deficit,” he said.
 
“With limited spare capacity in the economy, inflation is likely to exceed the 2-3% target so the RBA will need to continue to shift lending rates further into the restrictive zone next year.
 
“We expect another 100 basis points of tightening in 2011, bringing the cash rate to 5.75% by the end of the year.”
 
This will push mortgage interest rates up to around 8.5%, around where they were hovering in 2008, before the GFC hit.
 
According to the report, economic growth will be above average in 2011, but it will remain uneven, with less than half of the world’s economy predicted to grow strongly. 
 
Australia is only one of a few industrial countries – alongside Sweden, Switzerland and China – that is expected to experience high growth in 2011, and thus an increase in interest rates.

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