Low interest rates are doing their bit to boost the economy but business and consumers need confidence to take advantage of the situation, the Reserve Bank of Australia says.
The central bank is keeping an open mind about cutting the cash rate from its record-low of 2.5 per cent, RBA governor Glenn Stevens said.
But monetary policy "can't force spending to occur", the governor said in his testimony to a federal parliamentary committee on the economy on Wednesday.
Other policies are needed to instil confidence.
"We can lead the horse to water but the horse isn't going to drink until it feels like it," Mr Stevens said.
"People have to have the confidence to take the more accommodative credit conditions and use them."
Growth and prosperity, in the long run, don't come from manipulating interest rates or the exchange rate, Mr Stevens said.
"It comes from the productivity efforts of the million-plus enterprises that are out there in the economy and how they manage themselves and how their workforces cooperate with them," he said.
"They have to be willing to take a risk - on a new project, a new product, a new market, a new worker.
"Because we've had a decade-long period of rising terms of trade until recently, this hasn't been quite so acute in our thinking, but it ought to be acute now."
The governor made it clear that a lift in confidence needed to play an integral part in boosting activity, CommSec chief economist Craig James said.
"Confidence has been the key missing ingredient over the past year," Mr James said.
"However in the past couple of months both business and consumer confidence has lifted to levels that historically would support activity.
"The Reserve Bank officials basically believe that they have settings right to handle future challenges."
JP Morgan economist Ben Jarman said the governor seemed to prefer that another mechanism bear the burden of adjusting the economy.
"The governor becomes increasingly forceful that, as conditions stand today, bank officials are close to exhausting their potential to ease, given they do not feel the current shortfall in activity can be characterised as true demand weakness," Mr Jarman said.
"He noted that `cheap money is not the sustainable path to prosperity', so there needs to be further evidence of true demand weakness to get the RBA to cut again."
Despite the challenges being faced in the Australian economy, including the $47 billion federal budget deficit, Mr Stevens said Australia was still better off than most countries.
"Even with the debt numbers that have been put out yesterday and the projections, there are a lot of countries who would rather have that set of numbers than the ones they have," he said.
"I think we have problems, we have big challenges, but I'd rather have most of our challenges than the ones I see around the table with governors I sit with a number of times a year."
