The Reserve Bank says record low interest rates are reigniting the key industries it expects will pick up the slack as the resources investment boom weakens.
As markets debate whether interest rates have bottomed, deputy governor Philip Lowe said on Tuesday that lowering the cash rate to 3 per cent had boosted high-employing sectors including house building and retail.
But while Dr Lowe painted a picture of an improving domestic economy, he expressed grave concerns about the Cyprus government's plan for a tax on bank deposits, warning it increased the risk of bank runs.
The RBA has slashed the cash rate by 1.75 percentage points since late 2011, and economists are divided on whether its cutting cycle is over. While the Reserve has said it is ready to lower the cash rate further if needed, Dr Lowe said, lower borrowing costs had already contributed to a 4 per cent rise in house prices in the past year and the 20 per cent growth in share prices. He rejected claims lower rates were ineffective, saying there were "tentative" signs of improvement in retail and housing construction. "Equity prices are up over 20 per cent since the middle of last year," Dr Lowe said in Sydney. "Households do appear to be feeling better about both their finances as well as Australia's medium-term prospects."
Despite the latest bout of concerns over Europe, financial markets have sharply scaled back their expectations of rate cuts this year.
HSBC chief economist Paul Bloxham predicted the RBA would make no new cuts because housing activity was already responding to cheaper debt and officials would be wary of fuelling a housing bubble.
In board minutes published on Tuesday, the RBA predicted easing in the fierce competition for deposits, which banks have blamed for their failure to fully pass on official rate cuts.