RBA Governor Philip Lowe says climate change is having profound effects on the Australian economy

Reserve Bank of Australia governor Philip Lowe has said interest rates are likely to stay low for "years, if not decades", increasing the pressure on governments and business to invest but stoking fears about household debt and soaring house prices.

As the economy reels from the effects of an extended drought, disastrous bushfires and the coronavirus emergency, Dr Lowe said growth was "a bit weak" and flagged that interest rates were set to stay low for an extended period.

"It is quite likely that we are going to be in this world of low interest rates for years, if not decades, because it is driven by structural factors," the RBA governor told the Seventh Australia-Canada Economic Leadership Forum in Melbourne.

The RBA has held the official cash rate at a record low 0.75 per cent for the past four months amid concerns that the economy needs support in the face of difficult international and domestic conditions.

Dr Lowe said there was evidence that the lowest official interest rates in the nation's history were working to improve household finances and boost the value of assets, particularly housing.

But, indicating a reluctance to cut much further, he said very low interest rates were also creating concerning "vulnerabilities" in the economy, particularly the amount of debt households were accumulating.

Property market analyst CoreLogic said house prices were on track for their fastest-ever recovery after rebounding 6.7 per cent since mid-2019, and the household debt to income ratio has reached almost 200 per cent, one of the highest levels in the world.

"We consider in our interest rate decisions that when we cut we are encouraging people to borrow even more," the central banker said. "It's a consideration now."

Dr Lowe said there was a juncture at which low interest rates went from supporting households to improve their financial position to creating an incentive for them to take on more debt and "perhaps we are getting to that crossover point".

The RBA governor's comments sharpen the focus on the federal government's economic policies, particularly its sustained drive over the past seven years to slash spending in order to return the budget to surplus.

In December the government had forecast a narrow $5 billion surplus this financial year, but its $2 billion fire recovery package, drought relief measures and the economic costs of the coronavirus outbreak have raised significant doubts it will able to achieve that goal.

The government has also come under sustained pressure from economists and sections of the business community to abandon its surplus focus and increase spending to support the faltering economy, with unemployment anchored above 5 per cent, growth hovering below 2 per cent and wages stagnating.

The government has relied on monetary policy to provide most of the stimulus for growth, and Dr Lowe took a thinly veiled swipe at its approach.

"We have not had any fiscal stimulus in Australia," he said.

The RBA governor said government infrastructure spending had been "very helpful", but derided both government and business for failing to take advantage of record low interest rates to borrow and invest.

"I would like to see both business and government use the opportunity to make investments," Dr Lowe said. "Australian governments and business can borrow at the lowest rates since Australia became a federation."

Bank of Canada governor Stephen Poloz, speaking at the same forum, said Canadian government spending had made a "significant difference" in helping the North American country weather a series of serious economic shocks including a collapse in the price of oil.

Mr Poloz said without the government's fiscal policy support, Canada's central bank would have had to cut its interest rates to "at least" zero, which would have exacerbated vulnerabilities in the economy from soaring house prices and high household debt.

Dr Lowe also flagged that climate change will have "profound" effects on the economy, including reducing the value of many assets.

Dr Lowe said this summer's string of disasters, including drought and widespread bushfires, had sliced almost 0.5 of a percentage point off growth, and the effects of severe weather would accumulate.

RBA Governor Philip Lowe says interest rate will stay low "for years, if not decades".

RBA Governor Philip Lowe says interest rate will stay low "for years, if not decades".