AAP
Easing commodity prices, unsupportive fiscal policy and a persistently high exchange rate will retard economic growth and keep interest rate cuts on the agenda, NAB's group chief economist Alan Oster says.
Speaking in Sydney on Thursday, Mr Oster rejected the view that the Australian dollar was much overvalued and said he expected it to remain high.
"My answer to you is, it's not that far overvalued, because commodity prices are still at incredibly high levels," he said.
He said the National Australia Bank's modelling of the exchange rate using "fancy equations" put the Australian dollar at "parity (with the USD dollar) plus or minus five cents".
Late on Thursday the currency was hovering around 103.6 US cents.
Mr Oster also said relatively high local interest rates, as well as low levels of anxiety on global markets which had generated a greater appetite for "risk", were supporting the Australian dollar.
And he said foreign central banks wanted to reduce their exposure to the euro in favour of currencies related to China.
"You look at a triple-A economy, paying interest rates, incredibly correlated to China - it's called Australia," Mr Oster said.
He said 80 per cent of their favoured investment, Australian bonds, were now foreign owned.
And the Russian central bank wanted to put up to 10 per cent of its $500 billion of reserves into Australian dollars.
"So they've got to buy 50 billion (Australian dollars)", he said.
"So unless you're going to tell me China's going to go down, I'm going to tell you the Australian dollar's going to stay roughly where it is," he said.
"It's not going to go back to 80 US cents, people now realise that, and they're starting to say 'I either give up, or I become an importer'", he said.
And, even though the exchange rate would be held up by foreign demand, he said commodity prices probably would come down and stay down.
"And so you'll have less income sloshing around."
Further out, the mining boom would move into a production phase that would need far fewer workers than the construction phase
The economy had hit a soft patch, growing recently at an annualised pace of only around two per cent, less than two thirds of its trend rate.
And an extended election campaign was "not helping" the economy, but election outcome would make a difference to the "big picture", he said.
There would only be a significant difference if the contenders' policies on the currency, the central bank, or fiscal policy diverged.
"And unfortunately (on fiscal policy) I have no idea that they're going to change at all, because they're both trying to outcompete each other on who can get to a (budget) surplus first, which I think is really stupid."
The outlook for tight fiscal policy was one of the factors leading him to expect a sluggish economy and the need for more interest rate cuts.
"If you're going to have a currency staying where it is, fiscal policy's not going to do anything, there's a lot of heavy hitting still to be done by the RBA," Mr Oster said.