Australian consumer sentiment has risen to its highest level in more than two years in March, as lower interest rates were seen boosting economic activity in the country.

The Westpac-Melbourne Institute index of consumer sentiment showed a reading of 110.5 in March, up 2 percent from 108.3 in February when it rose 7.7 percent on month. The index which rose to the highest level since the end of 2010 in March was up 15 percent year-on-year.

The index is compiled from a survey of about 1,200 consumers who are asked to rate the past and future economic conditions. A reading above 100 indicates that more respondents are optimistic about the economy. The index has been in positive territory for the past five months.

"In recent months we have seen the accumulation of the cuts appearing to be genuinely boosting confidence," said Bill Evans, global head of economics at Westpac.

"Equity markets and the associated signals that global economic prospects are improving, are the other key driver of this improved confidence".

Between November 2011 and December 2012, the Reserve Bank of Australia cut key interest rate by 1.75 percentage points. The central bank, however, kept the cash rate on hold at 3 percent in February and March, equal to its post global financial crisis low.

Further increase in fuel prices and continued weakness of the Australian dollar, however, negatively affected the consumer confidence, said Evans.

A sub-index tracking views on family finances compared to a year ago increased by 3.9 percent while another sub-index tracking assessments of family finances over the next 12 months improved by 3.1 percent.

Consumers' outlook on the economy improve further with the sub-indexes tracking views on economic conditions over the next 12 months up 0.8 percent and economic conditions over the next 5 years up 6.0 percent.

Westpac did not expect the central bank to cut rates further in April, but it forecasts a further move later this year.