Warnings of rate raises by Westpac economist

31 August 2009

The Westpac - Melbourne Institute leading index of economic activity has reportedly risen by 1.8 points in June 2009, despite pulling an average far less than what was expected, with an annualised growth rate of -3.3 per cent, the predicted being 2.6 per cent long-term trend.

The index examines factors that will impact on the Australian economic growth three to nine months ahead.
Bill Evans, Westpac's chief economist, released a report detailing it forecasts for the index and its belief for the inaction of the Reserve Bank of Australia. Mr Evans explained that so far since February 2009 the index has been improving since its low of -6.1 per cent, believing that the worst is over.

"The pace of contraction of the growth rate of the leading index is easing considerably. Last month the growth rate registered minus 5.3 per cent compared to the current measure of minus 3.3 per cent," he wrote in the report.

"Westpac expects year average growth in 2009 of 0.2 per cent to be followed by growth of 1.8 per cent in 2010."

"The recent surge in both business and consumer confidence places considerable upside risks to these numbers but the new dimension of a Reserve Bank that appears to be signalling plans to raise interest rates must temper the outlook. The resilience of confidence to the prospect of higher rates will be a key determinant of the growth outlook."

Mr Evans stated that despite markets predicting action from the RBA in October or November, he predicts the central bank to hold off until 2010, with figures including credit cards rates being affected.

"Westpac's bias has been for the bank to hold off raising rates given that we still assess the current promising improvement in confidence to be fragile and an untimely rise in rates could significantly damage confidence.

"We believe the bank may also be mindful of these risks and will therefore delay its first move until February next year, when the recent improvement in economic indicators has had time to consolidate."

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