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Economic growth will trigger rate rise in August: Westpac

Westpac’s Melbourne Institute Leading Index has peaked, but will remain well above the long term trend of 3 percent over the next three to nine months, triggering fears of a rate rise in August.

Economic GrowthThe annualised growth rate of the Westpac–Melbourne Institute Leading Index, was 6.7 percent in May well above its long term trend of 3.0 percent, placing pressure on the RBA to increase interest rates to curb the rate of growth in the Australian economy.

Westpac Chief Economist, Bill Evans, commented that while the Westpac Melbourne Institute Leading Index had peaked and was on the way down, growth was still extremely robust in the Australian economy, far above long term growth figures.

“This is the second consecutive month when the growth rate in the Index has slowed. In absolute terms the growth rate remains remarkably high but it appears that growth in the Index has peaked. Despite the slowing, the current growth rate of the Index is still indicative of a stronger outlook for growth in the near term than Westpac expects.”

The effects of the Reserve Bank of Australia’s successive interest rate increases earlier in the year have caused the Westpac Melbourne Institute Leading Index to fall 1.9 percent, mostly due to decreased dwelling construction and other interest rate dependent variables impacting the Index.

“From the March peak in the growth rate (8.6 percent) we have seen a 1.9 points fall. The key factors behind the growth slowdown have been: dwelling approvals; overtime worked and share prices.” Said Mr Evans.

Westpac is now tipping a rate rise in August, as the strong economic growth figures in the Westpac Melbourne Institute Index suggest inflation will not fall below the 3 percent mark in the July figures due out within the next week from the ABS.

“Our forecast is that the recent fall in inflation has stalled and underlying inflation remains at 3 percent. With the minutes and the Governor’s speech
in Sydney yesterday indicating that the Bank retains its upbeat view on medium term prospects for growth it remains likely that there will be a rate hike at the August meeting. Sharply adverse developments in the global economy or a more benign read on inflation will allow the Board to defer a rate hike until later in the year”” Mr Evans said.

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David Olsen

David Olsen

An undercover economist and a not so undercover geek. Politics, business and psychology nerd and anti-bandwagon jumper. Can be found on Twitter: <a href="http://www.twitter.com/DDsD">David Olsen - DDsD</a>

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