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That's it for cuts, it's time to spend

Reserve Bank governor Glenn Stevens wasn't expected to put an interest rate cut under the Christmas tree on Tuesday. As far as he is concerned, the community hasn't made full use of the various rate cuts he has been giving it over the past few years.

Reserve Bank governor Glenn Stevens wasn't expected to put an interest rate cut under the Christmas tree on Tuesday. As far as he is concerned, the community hasn't made full use of the various rate cuts he has been giving it over the past few years.

Indeed, the generally upbeat tenor of Stevens' commentary suggests that that's about it for the rate cuts - the interest rate easing cycle is done. It is now time to digest the historically low 2.5 per cent and start spending.

The monumental lag between cutting rates and getting a response from Australian consumers has demonstrated that regardless of how cheap money is, if confidence (consumer or business) is low, the economy will be unresponsive.

Fears about the world economy and the end of Australia's mining boom have played havoc with the collective sense of financial wellbeing among households.

It is only recently that conditions have started to ripen for consumers to take a bit of what is on offer. It is only now that all these rates cuts can start to gain traction. The feeling that we are falling of the capital investment mining cliff remains - but the ramifications (or the reality) are not quite as confronting as expected, particularly for those living in non-mining states.

There has also been a trickle-through of the message that all that mining investment has increased the volume of iron ore and coal we are exporting and for which China is still paying reasonable prices (at least in the case of iron ore). Commodity prices have declined from their peaks, but generally remain at high levels by historical standards.

The RBA said there were signs the economy was starting to rebalance away from the focus on mining as other sectors have just started to take up some of the slack.

It won't be big enough and fast enough to fill the hole left by what was a massive few years of investment across mainly Western Australia and Queensland, and federal budgetary constraints means that investment in public infrastructure isn't going to help.

But the housing sector is starting to kick in and there are a few signs of life in some parts of manufacturing, while capex in the LNG sector is steaming along. At the very least there is more persistent talk around improvements in productivity.

"Private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook," Stevens said.

"There has been an improvement in indicators of household and business sentiment recently, but it is still unclear how persistent this will be."

In Australia, the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher.

While this sounds like an excuse for another rate cut, it isn't anywhere near dire enough.

Housing is the sleeper that the RBA has to watch.

On the one hand the hype around the improving property prices is stoking confidence, the knock-on effect of which is great for the overall economy. The RBA would dearly love to avoid an escalation to a property asset bubble.

Loan approvals for investment properties are spearheading this housing market rather than first home buyers or owner occupiers.

But when house prices rise we all feel wealthier - more confident and more inclined to spend at the shops.

To some extent, more robust sharemarkets also provide the broader community with some additional wealth-related confidence - people's superannuation is worth more.

Meanwhile, the market probably read a little too much into better-than-expected October retail data. There is a bit of post-election euphoria in these numbers.

And while they are probably sustainable (given the previous few months were positive as well) they may not be the start of a significant upswing in retail spending.

But it is a good omen and, even if the retail figures had been worse, we probably wouldn't have received the interest-rate cut.

But the jury is still out on how this Christmas is shaping up. There are signs that the major stores are getting ready to boost sales by engaging in discounting events over the next couple of weeks.

The only issue left for the RBA is what to do about the stubbornly high Australian dollar.

Its slippage in recent weeks has given Stevens a bit of respite but it needs to be a lot lower in order to kick along the economy and RBA jawboning is only going so far.

The timing and the extent of the tapering of the US stimulus is going have a far bigger effect on our currency than any thing in the RBA arsenal.

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