RBA’s Stevens less gloomy on resources even after iron ore price tumbles

BUSINESSDESK: Reserve Bank of Australia governor Glenn Stevens says the economy is growing "close to trend" while spending in the resources sector has increased, suggesting raw materials will help underpin the economy a while longer.

The central bank kept the cash target unchanged at 3.5%, as expected, at its review yesterday afternoon.

His assessment of trend growth comes a day before second-quarter gross domestic product data, which is expected to show the economy grew 0.7% for an annual rate of 3.6%.

"Most indicators available for this meeting suggest growth has been running close to trend, led by very large increases in capital spending in the resources sector," Mr Stevens says in a statement on the RBA website.

The Australian dollar rose to $1.0268 from $1.0229 immediately before the report was released.

"Consumption growth was also quite firm in the first half of the year, though some of that strength was temporary," he says.

"Labour market data have shown moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low."

At the same time, inflation remains low and that has provided some comfort the RBA does not have to think about raising rates any time soon.

Prices of Australia's biggest raw material exports, iron ore and coal, have tumbled. Iron ore is now at a three-year low.

"Some commodity prices of importance to Australia have fallen sharply in recent weeks," Mr Stevens says. "The terms of trade peaked a year ago and have declined significantly since then, though they remain historically high."

World economic growth has softened since showing signs of strength earlier in the year, he says, echoing comments in recent statements. He sees global growth at "no more than average pace in 2012, with risks to the outlook still on the downside".

Of the global financial markets he says: "Capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis."

Underlying inflation is expected to be "near 2% over the year to June, and headline CPI inflation lower than that".