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Consumer sentiment has surged to its highest level in one and a half years, dampening hopes of further interest rate cuts as Australians continue to be optimistic about the outlook for the domestic economy.

The positive mood was being driven by recent cash handouts by the Federal Government as part of its fiscal stimulus measures, a relatively resilient jobs market and a low interest rate environment, economists said.

The Westpac-Melbourne Institute index of consumer sentiment rose by an unexpectedly strong 9.3 per cent in July to a seasonally adjusted 109.4 points, after jumping by a record 12.7 per cent in June.

The July reading showed optimists “decisively” out-numbered pessimists for the first time since December 2007.

“This is unquestionably a stunning result,” Westpac Banking Group chief economist Bill Evans said in a statement on Wednesday.

The outcome should reassure the Reserve of Australia (RBA) that the economy is holding up well despite a downturn around the world, and reduce the chances of further central bank interest rate cuts.

The RBA on Tuesday left the cash interest rate unchanged at three per cent, but said there was some scope to ease rates again if it was needed to sustain the economy.

“In these volatile times the situation can change rapidly with the labour market and the global economy being the most likely candidates,” Mr Evans said.

“However, we must say that the probability of the bank acting on its bias has diminished markedly.”

The consumer sentiment index has grown by 23.2 per cent over June and July – the largest two-month increase since the survey began in 1974.

Previously, the largest two-month increase was 18.8 per cent in March 1992 when households were convinced the Australian economy was coming out of recession.

“The latest consumer sentiment survey is certainly eye popping,” CommSec economist Savanth Sebastian said.

“Consumer sentiment is well and truly out of the doldrums.”

The July increase in sentiment followed federal government cash handouts to taxpayers and the most recent gross domestic product data showing the economy grew by 0.4 per cent in the March quarter.

The federal government stimulus packages were released in two tranches. In December, pensioners and carers received an $8.4 billion boost, while low and middle income earners were given $12.7 billion in cheques between March and May.

“Sentiment and spending failed to respond to the first tranche,” Mr Evans said.

“No such criticism can be levelled at the second tranche.

“It has now been almost fully disbursed and has resulted in an instant boost to retail sales and supported this surge in confidence.”

The unexpected resilience of the labour market had also played a role in boosting confidence.

“It appears that firms, which only a year ago were nominating a shortage of quality labour as the major constraint on their businesses, are now hoarding labour,” Mr Evans said.

“Workers are feeling more secure in their jobs.”

The unemployment rate is currently at 5.7 per cent – which is better than the higher rates being logged in other major industrialised nations.

But new labour force data to be released on Thursday July 9 is expected to show it has risen to 5.9 per cent.

The survey of 1,200 people aged over 18 was conducted between June 29 and July 5.