the level of consumer confidence is now well above its long - run average level ( graph 5 ). despite what one often hears, households do appear to be feeling better about both their finances as well as australia ’ s medium - term prospects. graph 5 the one notable exception to the expected responses following a substantial easing of monetary policy is that there has been little movement in the exchange rate. however, this reflects the global factors that i talked about earlier, and the reserve bank has attempted to calibrate the setting of monetary policy to take account of this. now, if the monetary transmission mechanism works broadly as it has in the past, then an improvement in consumer sentiment and higher asset prices should feed through, in time, to higher spending by households. there are some signs, albeit still tentative, that this is beginning to occur. abs data and the bank ’ s liaison suggest slightly firmer retail spending over recent months than over the second part of last year, though conditions remain mixed across the industry. there are also signs of a pick - up in the forward indicators for new dwelling construction across many areas of the country. in addition, a number of labour market indicators, after having softened last year, have had a slightly firmer tone of late. another critical element in the monetary transmission process is a pick - up in private business investment. this is often the last link in the chain, and typically follows increased confidence and higher spending. given the nature of the investment boom we are currently experiencing, it is non - mining investment where we are looking for this pick - up to occur. as mining investment inevitably peaks and then gradually declines, a critical question for the outlook is the strength of this expected pick - up in non - mining investment. we cannot know the answer to this question yet. what we do know is that other parts of the transmission mechanism appear to be working broadly in line with our expectations and that there are some tentative signs of a lift in investment intentions outside the resources sector. the most noteworthy of these was the capital expenditure data published by the abs a few weeks back, which show that firms expected to increase spending on non - mining construction and on machinery and equipment investment in the next financial year. whether the increases will be sufficient to offset the expected lower levels of mining investment is something that we will be watching very carefully over the months ahead. bis central bankers ’ speeches so let me conclude by restating the main message that i started with – that is, that the australian economy has adjusted

and relatively low unemployment rate and inflation at target. by the standards of most other countries, this represents a very good outcome and a high degree of internal balance. remarkably, we have achieved this balance despite experiencing the biggest boom in business investment and the largest rise in the terms of trade for over a hundred years ( graph 1 ). in the past, much smaller investment and terms of trade booms caused outbreaks of inflation and the emergence of other imbalances in the economy. on this occasion this has not happened. the investment boom has not led to a large increase in the current account deficit. there has not been an explosion in credit. increases in asset prices have generally been contained. and the average level of interest rates has been below the long - term average, despite the very significant additional demand generated by the record levels of investment and the terms of trade. bis central bankers ’ speeches graph 1 there are a number of factors that are important to understanding how domestic or internal balance has been maintained, with generally low interest rates, despite the very large shocks experienced by the australian economy. this morning, i would like to focus on just two of these. the first is the flexible exchange rate. the high levels of investment and commodity prices have been associated with a high value of the australian dollar. this has clearly caused some difficulties for parts of our economy, including the manufacturing, tourism and education sectors. but from an overall macroeconomic perspective, the appreciation of the exchange rate has played an important stabilising role. had we not experienced the sizeable appreciation over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates. this would not have been in the interests of the community at large or, i might add, in the interests of the sectors currently being adversely affected by the high exchange rate. it is also worth adding that, in any case, it is unlikely that we would have avoided a substantial real exchange rate appreciation, with it coming through the more costly route of higher inflation. this, of course, does not mean that, at each and every point in time, the exchange rate is at its ideal rate from a domestic balance perspective. we should not forget that exchange rates are relative prices between two countries ’ moneys. this means that they are determined both by what is happening domestically and by what is happening abroad. this has been obvious over recent years, with the very accommodative