DOMESTIC policymakers now have to manage the recovery in the local economy as the pace of the mining boom gathers pace, the Reserve Bank (RBA) says.
RBA governor Glenn Stevens said the central bank had to ensure the local economy expanded without many bumps as the recovery proceeded.
"Our task now is one of trying to ensure, so far as we can, that the new economic upswing turns out to be durable and stable,'' Mr Stevens said in a speech in Toowoomba.
Demand for mineral resources has rebounded with the prices of the commodities rising, Mr Stevens said.
"As a result of those and other developments, Australia's terms of trade will, it now appears, probably return during 2010 to something pretty close to the 50-year peak seen in 2008,'' he said.
"However, the fact that we will have reached that level twice in the space of three years suggests there is something more than just a temporary blip at work.''
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The demand for minerals has led to an increase in investment for natural resources, which was expected to add to economic growth in the coming decade, Mr Stevens said.
"But of course there is also a once-in-a-century build-up in resource sector investment, which could see that investment, already high, rise by another 1-2 percentage points of GDP over the next four or five years.
"There are also high levels of public sector infrastructure investment planned in coming quarters and the housing needs of a rapidly growing population are likely to see demand for new dwellings remain quite strong over time.''
Mr Stevens said strong growth among trading partners, a rising terms of trade lifting national income, firm confidence of firms and households and strong population increase was likely to keep the economy expanding.
"This big picture view is why we expect that, short of something serious going wrong in the global economy, Australian growth in 2010 will be a bit faster than in 2009 - at something close to trend,'' he said.
Australia's real gross domestic product expanded by 2.75 per cent during 2009, he said.
Economists consider the trend growth in the economy to be around 3.0 - 3.25 per cent.
Inflation is unlikely to fall much further as the economy continues to expand throughout 2010, Mr Stevens said.
The central bank uses monetary policy - interest rates - to keep inflation within its target band of 2-3 per cent over the economic cycle.
The rate of headline inflation was an annual 2.1 per cent in the December quarter, according to official data.
Underlying inflation, the RBA's preferred measure as it removes volatile price movements, was 3.4 per cent.
"A year ago, when we thought we might be going into a significant recession, there seemed to be the possibility that inflation could fall noticeably below the target,'' he said.
"That doesn't seem very likely now, though, with a recovering economy, rising raw material prices, the labour market having stabilised and with some firms even beginning to worry again about skill shortages.''
Mr Stevens said interest rates would be expected to be pretty close to average with an the economy growing close to trend, and inflation was close to target.
"The Reserve Bank has moved early to raise the cash rate to levels that deliver interest rates for borrowers and depositors more like those that have been the average experience over the past 10 to 12 years,'' he said.
"Those interest rates are now pretty close to that average.''
The RBA lifted the overnight cash rate by 25 basis points to 4.25 per cent on April 6, its fifth such move in seven months.
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