Central bank backs fund to invest mining cash

The Australian dollar reached its highest level against the US dollar since 1983 by advancing to US$1.0294 last week. Photo / Thinkstock

Australia may benefit from setting up a fund to collect extra revenue generated by high commodity prices and invest it overseas, a Reserve Bank of Australia research paper has shown.

"Offshore investment brings diversification benefits and helps reduce the upward pressure on the real exchange rate and resulting negative effects on the tradeable and import competing sectors," according to papers prepared in the first half of 2010 and released on March 25 under a Freedom of Information request from the Australian.

The dollar last week advanced to US$1.0294 on March 25, the highest level since it began trading freely in 1983, as gains in global stocks boosted demand for assets related to economic growth.

RBA Governor Glenn Stevens said establishing a stabilisation fund, which could be tapped when commodity prices decline and revenue falls, "is an option worth thinking about".

Australia is undergoing its biggest mining investment expansion since the 19th century to meet rising demand for the nation's iron ore and coal.

The RBA boosted its benchmark interest rate seven times from October 2009 to November 2010 to 4.75 per cent to contain inflation as the boom bolsters employment growth and spurs the local currency.

The research paper, by RBA economist Kristina Clifton, noted Australia faced a surge in capital inflows in anticipation of the mining boom. Quarterly inflows could increase to US$29 billion, or more than 10 per cent of gross domestic product, spurring the local currency.

"To the extent that any potential inflows are not offset by an increase in capital outflows," it said, "there is likely to be an increase in domestic asset prices, including the exchange rate."

- BLOOMBERG