By Tom Westbrook

By Tom Westbrook


SYDNEY (Reuters) - Australian shares are set to edge fractionally higher over the rest of this year and then extend gains in 2017, driven by record-low interest rates and buttressed by recovering commodity prices, a Reuters poll of analysts and strategists found.


A mooted series of U.S. Federal Reserve interest rate hikes and a broader spike in global bond yields were cited as the biggest risks, and are expected to keep the Australian Securities Exchange's main index from breaking through the 6,000-point barrier this year and next.


The benchmark S&P/ASX 200 index <.AXJO> has added over 3 percent this year and in July had its strongest month in almost five years as global stocks rallied after a brief spill following Britain's vote in June to leave the European Union.


It is forecast to end 2016 at 5,500 points, 0.4 percent higher than Monday's closing level of 5,478.51 and nearly 4 percent higher for the year, according to the median prediction of 16 strategists polled by Reuters in the past week.


The respondents' views are in line with forecasts made three months ago, although some strategists trimmed hopes for a strong performance during 2017. By end-June 2017 the index is seen steady at 5,550 points, and further up to 5,800 by end-2017.

While that represents a 6 percent gain over the next 15 months, it also amounts to a sideways step from the 5,803 hit in May 2015.

Since then the prices of oil <LCOc1> and iron ore <.IO62-CNI=SI> tumbled - iron falling almost 35 percent and the oil price halved, but both commodities have rallied in 2016, each gaining around 30 percent for the year to date.

The two commodities account for half of Australia's exports by dollar value.

"The ongoing recovery and stabilization of commodity prices suggests materials will be one sector that will outperform," said Michael McCarthy, chief market strategist at CMC Markets.

"We're in a subdued positive growth environment. And in that environment sentiment is likely to drive markets and they're likely to fluctuate around that central modestly positive scenario."

In the broader economy, however, retail sales have been anemic, consumer confidence is falling, and inflation fell in March for the first time since the 2008 global financial crisis.

But recent data showed Australia's A$1.6 trillion ($1.23 trillion) economy expanded 3.3 percent in the year to June, the fastest pace in four years.

Investors will be hoping that the worst is over for Australia's battered resources sector, which has had a tough time since a mining investment boom began to fade in 2014.

This year, BHP Billiton Ltd <BHP.AX>, the world's biggest miner, reported its worst ever loss while rival Rio Tinto Ltd <RIO.AX> posted its weakest earnings in more than a decade. But both results beat analysts' expectations and the share prices of both companies have risen since.

(Reporting by Tom Westbrook; Editing by Eric Meijer)