Reserve Bank governor Philip Lowe has warned high unemployment is likely to plague Australia for some time.
The jobless rate has risen to 7.5 per cent and the number of people unemployed has hit one million for the first time.
The central bank expects the jobless rate to reach 10 per cent by the end of the year and predicts it will still be seven per cent in two years time.
“High unemployment is likely to be with us for some time and I think that should be a concern for us all,” Dr Lowe told a parliamentary committee via video link on Friday.
He expects economic growth to have contracted by seven per cent when the June quarter figures are released next month, the biggest decline in many decades.
“If there is any good news to be found here, it is that this decline is not as large as initially feared,” he said.
The Reserve Bank has kept the cash rate at a record low of 0.25 per cent since March and has indicated it will not increase it until progress has been made towards full employment and inflation is back under control.
“These conditions are not likely to be met for at least three years,” Dr Lowe said.
The governor would not say monetary policy was exhausted but conceded there were limits to what it could do, with fiscal policy crucial to further stimulus.
He did not rule out a policy of negative interest rates but said it was extraordinary unlikely.
“In a world that is so uncertain and fluid, I don’t think it is prudent to rule it out,” Dr Lowe said.
He said the main benefit of a negative cash rate would be stimulating the economy through downward pressure on the Australian dollar.
But negative interest rates impaired 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.
“So negative interest rates can become contractionary … I don’t think the cost benefit justifies negative interest rates,” Dr Lowe said.
He dismissed suggestions the Reserve Bank should create money to directly finance spending.
“I want to make it clear that monetary financing of the budget is not on the agenda in Australia,” he said.
“There is no free lunch. There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently.”