Westpac index shows improving Australian growth, RBA set for hawkish hold

The below-trend reading has been improving, which provides the Reserve Bank of Australia scope to keep rates steady at its September meeting while maintaining its tightening bias. This aligns with Westpac's view that the central bank will deliver a "very hawkish hold" before raising rates again later this year. For the Australian dollar, the data sends conflicting signals. Stronger momentum and a resilient second quarter back the case for further hikes, normally supportive for the currency due to rate differentials. However, Westpac notes that labour markets, financial markets, commodity prices and consumer confidence remain weak, leaving scope for disappointment if the improvement stalls. Fresh threats to sentiment come from rising fuel costs and a housing market slump, which could dampen domestic demand and thus reduce the RBA's confidence to keep tightening. Markets are likely to view the report as a moderate positive for the RBA's hawkish stance but are not expected to shift near-term rate expectations meaningfully, given that the central bank is not anticipated to move until after the October 28 inflation update.

Westpac's Leading Index indicates that Australian growth momentum is still weak but is improving. This is sufficient to maintain the RBA's hawkish stance without requiring a hike in September. Another rate increase is anticipated after the October inflation data confirms the trend.

Report summary:

• The Westpac-Melbourne Institute Leading Index's annualised growth rate climbed to -0.09% in August from -0.17% in July, remaining under the long-run trend.
• While momentum has picked up since mid-year, it is still below the +0.26% average that prevailed for most of 2025.
• Westpac describes the current below-trend period as milder than the 2022-2024 cost-of-living phase, during which the index averaged -0.46% and hit lows around -1%.
• Increased data centre investment and stronger dwelling approvals have helped counter negative contributions from labour markets, financial markets, commodity prices and consumer confidence.
• Westpac has raised its year-end annual growth forecast to 1.5% from a previous 1% forecast.
• Westpac anticipates the RBA will leave rates unchanged at its September 28-29 meeting but lift them again following the October 28 quarterly inflation report, labelling the September decision a "very hawkish hold".

According to Westpac's economics team, the Leading Index of Economic Activity recorded another improvement in August, with the six-month annualised growth rate increasing to -0.09% from -0.17% in July. Although still under the long-run trend, the reading suggests stabilising momentum rather than further weakening, a sign that Westpac views as broadly in line with the resilience observed in Australia's June quarter national accounts.

This improvement occurs as the RBA has already increased interest rates three times this year to steer inflation towards its 2 to 3 percent target, and further tightening is anticipated. Westpac's economists expect the central bank to raise rates again by the end of the year but to stay on hold at the upcoming September 28-29 meeting, waiting for a more comprehensive quarterly inflation report on October 28. Westpac characterises the probable September decision as a "very hawkish hold".

The index's growth rate has returned to roughly the same level as six months ago, having barely changed from the -0.07% recorded in February. However, the makeup of the improvement has changed noticeably. Over the past half-year, larger negative contributions have come from labour markets, financial markets, commodity prices and consumer sentiment, which together have subtracted 0.42 percentage points from the index's growth since February. This weakness has been balanced by a better reading from dwelling approvals, which added 0.32 percentage points, and a strengthening in US industrial production, which contributed another 0.08 percentage points.

Westpac warns that this combination raises doubts about the sustainability of the recent upturn. Higher fuel prices and worries about additional rate rises seem to be dragging on consumer sentiment anew, and a slump in established housing markets is also making an impact. The bank cautions that these pressures could ramp up in the short term and possibly extend to other parts of the index.

Despite these concerns, Westpac has raised its year-end annual growth projection to 1.5% from an earlier 1% estimate, concluding that the economy's fairly strong showing in the June quarter will probably continue through the latter half of 2026 and into early 2027, even with the drag from higher interest rates and a global energy shock.