An upswing in non-mining investment and a healthy infrastructure pipeline has cheered the central bank, but it is still worried that housing debt is growing faster than wages.
Announcing the official interest rate will remain on hold at 1.5 per cent, Reserve Bank of Australia governor Philip Lowe said the economy will gradually grow over the coming year, and noted an improvement in non-mining investment.
"Over recent months there have been more consistent signs that non-mining business investment is picking up," he said on Tuesday.
"A consolidation of this trend would be a welcome development."
Dr Lowe said business conditions were good, and noted a large pipeline of infrastructure investment.
"Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending," he said.
"Growth in housing debt has been outpacing the slow growth in household incomes for some time."
Dr Lowe said growth in investor borrowing has slowed following the introduction of supervisory measures by the Australian Prudential Regulation Authority.
He also noted there have been further signs of cooling property prices in Sydney.
AMP Capital chief economist Shane Oliver said the RBA appeared more confident about the investment outlook, and had noted that stronger employment should eventually drive wages growth.
But he said the bank also had to contend with the impact of a strong Australian dollar, an impending slowdown in housing construction, and low underlying inflation.
"The RBA and official interest rates remain stuck between a rock and a hard place," Dr Oliver said.
"The next move in rates is likely to be up, but for now the downside risks are still significant and as such we remain of the view that it's way too early to start raising rates just yet."
Dr Lowe told federal parliament in August the next move in rates was likely to be up, but it would not come any time soon.
NAB chief markets economist Ivan Colhoun said there was nothing in Dr Lowe's statement on Tuesday to suggest an early rate increase.
The Australian dollar dipped as low as 77.93 US cents following the rates announcement, the first time the local currency has dropped below 78 US cents since mid-July.