Dr Lowe said the RBA understood the impact on savers, but said one of the reasons for lower interest rates was global in nature.
“World interest rates have moved lower over the past decade. This is mainly because of structural factors related to ageing of the population, productivity growth, slower population growth and high rates of saving in Asia,” he said.
“Since we live in an interconnected world, we cannot ignore this shift in world interest rates.”
Dr Lowe said if interest rates had not been cut, the economy would have deteriorated.
“If interest rates had not been reduced last year this adjustment in household finances would have been more difficult and the overall economy would have suffered,” he said.
“The lower interest rates have made it easier for people to manage their debts and, on the other side of the balance sheet, they have boosted asset values.
“In doing so, they are bringing forward the day when households feel sufficiently comfortable to increase their spending again. The easing of monetary policy is also supporting a turnaround in housing investment and has also had an effect on the exchange rate, which boosts demand for our exports. So, it is working.”
The bank held interest rates steady at its meeting this week. Dr Lowe said there was a discussion about cutting rates further, but there had to be a balance between faster economic growth and the risks that ultra-low rates might pose.
“Internationally, there are increasing concerns about the effect of very low interest rates on resource allocation in the economy 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 housing debt is already quite high and there is already a strong upswing in housing prices in place. If so, this could increase the risk of problems down the track.”
The bank raised the issue of possible quantitative easing last year in response to a slowdown in the economy.
Dr Lowe said it would be extremely unlikely for the RBA to engage in quantitative easing.
“Negative interest rates in Australia are extraordinary unlikely. This is not a direction we need to go in,” he said.
“The threshold for undertaking QE – that is, the RBA purchasing assets through balance sheet expansion – has not been reached in Australia and I do not expect it to be reached. So, it is not on our agenda at the moment.”
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.