Reserve Bank governor Philip Lowe is not ruling out a policy of negative interest rates but says it it is extraordinary unlikely.
“In a world that is so uncertain and fluid, I don’t think it is prudent to rule it out,” Dr Lowe told a parliamentary hearing on Friday.
The cash rate has been at a record low of 0.25 per cent since March in the face of the biggest economic contraction for decades.
It is expected to stay that way for several years.
Dr Lowe said the main benefit from a negative cash rate would be stimulating downward pressure on the Australian dollar.
However, he said negative interest rates do impair the profitability and efficiency of the financial system, while also hampering the ability to provide credit.
“Negative interest rates also encourage people to save more, not spend more,” he said.
Someone putting $100 in the bank may only get $95 back in five years’ time under a negative interest rate policy.
In some European countries and Japan, there is evidence this has resulted in people wanting to save more.
“So negative interest rates can become contractionary … I don’t think the cost benefit justifies negative interest rates,” Dr Lowe said.
He took issue with committee deputy chair and Labor MP Andrew Leigh suggesting he was putting bank profits before jobs.
“What I want to see is the credit supply work properly because we need banks that are profitable and are willing to supply credit and that credit supply markets are not distorted.”