Australian economic conditions are at their strongest in 10 months and are expected to improve as the central bank further stimulates the economy.

The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was at 1.6 per cent in May, well below its long-term average of 2.6 per cent.

However, Westpac chief economist Bill Evans said the growth rate is the fastest since September 2011 and it will improve in the latter half of 2012 and into early 2013.

“That profile presumes further interest rate relief through the second half of 2012 although the current disposition of the monetary authorities appears to be to sit tight for the next few months,” Mr Evans said.

“Apart from mining, other sources of spending – residential housing and business investment were soft and reliably in line with the signals from the Leading Index in 2011.”

The annualised growth rate of the Coincident Index, which indicates the rate of current economic activity, was 4.2 per cent, well above its long-term trend of 3.1 per cent.

The Reserve Bank of Australia (RBA) kept the cash rate at 3.5 per cent at its July board meeting after a surge in local economic growth.

Mr Evans said he expects the RBA to not move the cash rate at its August board meeting.

“Despite our own scepticism, the (RBA) board was clearly impressed by the 1.3 per cent surge in GDP (gross domestic product) growth in the March quarter,” he said.

“As indicated by the rise in employment, which is key to the increase in the coincident index, the board describes the labour market conditions as relatively favourable.”