The Reserve Bank has declared that record low interest rates are starting to reignite activity in certain industries, and it expects these to pick up the slack as the resources investment boom fades.
As markets debate whether interest rates have hit their trough, RBA deputy governor Philip Lowe said on Tuesday lowering the cash rate to 3 per cent had given a boost to high-employing sectors, including housing construction and retail.
But while Dr Lowe painted a picture of an improving domestic economy, he also expressed grave concerns about the Cypriot 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 need be, Dr Lowe said the reduction in borrowing costs had already contributed to a 4 per cent rise in house prices in the past year and the 20 per cent annual growth in share prices.
He rejected claims that lower rates were ineffective, saying there were "tentative" signs of improvement in retail and housing construction, and the evidence suggested "lower interest rates are doing their work broadly as expected".
"Equity prices are up over 20 per cent since the middle of last year. And the level of consumer confidence is now well above its long-run average level," Dr Lowe said. "Despite what one often hears, households do appear to be feeling better about both their finances as well as Australia's medium-term prospects."
On the Cyprus government's plan to tax bank deposits, Dr Lowe said he had been "very, very surprised" by the policy to impose a "haircut" on small depositors.
The deputy governor said the move threatened to undermine confidence that money held in banks was secure.
"It could make the system more susceptible to bank runs," Dr Lowe said. "That's something that the authorities in Europe will have to watch very carefully."