Rate rise not for 12 months, Westpac economist predicts

THE outlook for economic growth appears to be stabilising and may push back the next interest rate rise, a report shows.

THE outlook for economic growth appears to be stabilising and may push back the next interest rate rise, a report shows.

The Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, rose 5.3 per cent in March.

This is well above its long-term trend of 3.4 per cent.

Westpac chief economist Bill Evans said the leading index's growth rate appeared to be stabilising above its trend rate.

"That growth pace is broadly consistent with Westpac's forecast that the Australian economy will be growing at an annualised pace of around 4.5 per cent in the second half of 2011,'' he said.

"The first half of 2011 will be distorted by the likely contraction in the economy in the first quarter, which will be mainly due to a likely drag on the growth rate of nearly two percentage points from the external sector and inventories.''

Mr Evans said the case for the Reserve Bank of Australia to raise the cash rate this year was still yet to be made.

"While it is reasonable for markets to assume that one month is not critical to a central bank market, pricing does not give full certainty to a hike until June next year,'' he said.

"The implication is that markets expect that the bank, despite its very clear rhetoric, is unconvinced about the need to hike and will need to build a stronger case.

"The markets seem to believe that case will not be fully made for more than a year.''

The coincident index, which shows what conditions are at present, is at 2 per cent, well below its long-term trend of 3.2 per cent, the report shows.