He said last year’s rate cuts were being used by households to pay down their debt, particularly mortgages, which would help free-up consumption going forward.
But the governor used a key part of his speech to warn while the economy’s fundamentals were sound, “strong and consistent growth” would require the nation to invest in its future.
Dr Lowe said investment spending had trended down over recent years which was compounding lower productivity growth.
“We have experienced a troubling decline in productivity growth. While the reasons for this are complex, it is hard to escape the conclusion that higher levels of investment spending would promote productivity growth and our collective living standards,” he said.
“The list of areas where further investment would improve our future prospects is well known. It includes investments in infrastructure, in human capital, in energy production and distribution, in new data technologies, and in measures to deal with climate change and its effects.
“Businesses, as well as governments across Australia are addressing these areas and it is important that they remain focused on them.”
Since the RBA started cutting interest rates in June, the national property market has lifted sharply. Sydney and Melbourne property prices have accelerated, growing at an annualised rate of more than 10 per cent.
Dr Lowe said while prices had climbed, there had also been an increase in early mortgage repayments by borrowers.
“The lower interest rates have assisted with both sides of the balance sheet. They have allowed people to pay down their liabilities more easily, and they have also boosted asset prices,” he said.
“So they are helping, not hampering, the process of balance sheet adjustment. In doing so, they are also bringing forward the day when households feel comfortable to lift their spending again.
“We need to remember that it is possible to have too much of a good thing. We are aware of the risk of low interest rates encouraging too much borrowing and driving excessive asset valuations. So we will continue to watch borrowing, in particular, very carefully.”
Dr Lowe said the case for a further rate cut was discussed at the bank’s Tuesday meeting, with such a move likely to help people pay down their debt even faster while also putting downward pressure on the Australian dollar.
But there were also risks from taking rates even lower.
“Internationally, there are increased concerns about the effect of very low interest rates on resource allocation and their effect on the confidence of some people,” he said.
“Lower interest rates could also encourage more borrowing by households eager to buy residential property at a time when there is already a strong upswing in housing prices in place.
“If that occurs, this could increase the risk of problems down the track. So there is a balance to be struck here.”
Dr Lowe said if the unemployment rate started to trend upwards, as some private sector economists expect, then a rate cut was more likely.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.