A leading index that indicates the likely pace of economic activity relative to trend six months into the future has "stalled," the Westpac-Melbourne Institute reported Wednesday.

The six-month annualized growth rate of the Leading Index slowed to positive 0.02% in January from a positive 0.44% in December, said Westpac Economics, an arm of Westpac, the large Australian bank.

Soft consumer expectations and modest housing starts undercut the index in January, advised Westpac.

The Leading Index still indicates growth in the Australian economy in 2026, but that the pace of the expected expansion, looking forward, is easing.

For the full year 2026, Australia's gross domestic product (GDP) should grow by 2.5% on year, affirmed Westpac.

However, there are headwinds that may undercut that outlook, said the bank.

Softer "signals from consumer sentiment-based measures are likely to persist, the main driver here being a turnaround in interest rate expectations," said Westpac.

Indeed, the Reserve Bank of Australia (RBA) on Feb. 3 raised its key policy rate to 3.85% from 3.60%, citing stubborn inflation and tight labor markets.

"With the RBA's February rate hike only just starting to impact and a further increase expected, some more softening is likely in the consumer sentiment, unemployment expectations and yield spread components," said Westpac.

In addition, stronger commodity prices tend support the Leading Index, due to Australia's resource-rich economy, but the outlook is also iffy for natural-resource sectors.

Easing commodity prices in 2026, are "likely to have even more of a dampening effect on index reads in the next few months," added Westpac.

The RBA may skip a rate hike at its pending Match 16-17 policy session, but given inflation pressures, "another 25 basis point rate hike looks likely to come at the RBA's May 4-5 meeting," said Westpac.