Use low rates now to save the economy, RBA governor urges

Reserve Bank governor Philip Lowe has effectively ruled out taking Australian interest rates below zero, urging businesses to use current rates to invest while conceding monetary policy is not working the same way it has in the past.

As former prime minister Paul Keating urged governments to embark on major construction projects including a fast train linking Sydney and Newcastle, Dr Lowe used an address to back investment in long-lived infrastructure that was now financially justifiable.

RBA governor Philip Lowe has all-but ruled out taking interest rates below zero, arguing business should be out investing in long-lived infrastructure now.Credit: AAP

The central bank cut official interest rates to an all-time low of 0.75 per cent this month and markets believe they could fall to 0.5 per cent next year. Globally, interest rates have also collapsed with three-quarters of all government bonds at negative yields.

But concerns have been raised the RBA's latest rate cuts have hurt consumer confidence. Tuesday's ANZ-Roy Morgan measure of consumer sentiment slipped again, with views of current economic conditions at their lowest level since early 2017.

Dr Lowe said the bank's three interest rate cuts this year were helping the economy, adding that without them the Australian dollar would be higher, fuelling disinflationary pressures across the economy and hurting the job market.

They would be low for a long period, he said, while all-but rejecting notions they could go negative.

"We are confident that these reductions are helping the Australian economy and supporting the gentle turning point in economic growth," he said.

"It is extraordinarily unlikely that we will see negative interest rates in Australia.

"It is likely though that we will require an extended period of low interest rates to reach full employment and for inflation to be consistent with the target."

Dr Lowe conceded low interest rates were hurting those with savings, admitting there was a balancing act in dealing with the economy.

He said a range of issues, from slowing global population growth to geopolitical tensions, meant central banks were not getting the same reactions from interest rate cuts as has been the norm.

"We recognise that monetary policy is not working in exactly the same way that it used to," he said.

Traditionally, low interest rates have encouraged businesses to borrow money for new investment.

OECD figures released on Tuesday revealed foreign direct investment flows fell by 20 per cent in the first half of this year. They dropped 5 per cent in the first three months and then by 42 per cent in the three months to the end of June.

Dr Lowe said while there were some Australian businesses using current low rates to make long-lived investments, more should be taking advantage of the current unusual situation.

"At low interest rates, many investments that didn't make sense at higher interest rates should now make sense," he said.

"This means that low interest rates give us the opportunity to lengthen our horizons and think about projects with really long-term payoffs."

He made the comments after Mr Keating said the government should take advantage of current low interest rates to invest in very large infrastructure projects which had bipartisan support.

Former prime minister Paul Keating says governments should be using low interest rates to invest in infrastructure.Credit: AAP

He nominated a fast train between Newcastle and Sydney, which could be extended to the NSW south coast, as an idea that would deliver substantial economic and social benefits.

"What we want is a long program of really important infrastructure," he told broadcaster Alan Jones.

"A fast train from Sydney to Newcastle would completely change the housing pressures inside Sydney. Essentially you'd turn Newcastle into a suburb of Sydney but that relieves the housing pressures in Sydney, it lifts housing values in Newcastle."