The head of the Reserve Bank warns high unemployment is likely to plague Australia for some time and the economy will not return to normal until the pandemic is under control.

It could mean interest rates remain at record lows for another three years.

“Even if we don’t have restrictions, people are nervous and when you are nervous you don’t spend and firms don’t invest,” Philip Lowe told a parliamentary hearing on Friday.

Both consumer and business confidence has weakened sharply since Victoria imposed harsh restrictions to stamp out coronavirus.

At the same 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 unemployment to reach 10 per cent by year’s end and predicts it will still be at seven per cent in two years.

“High unemployment is likely to be with us for some time and I think that should be a concern for us all,” Dr Lowe said.

He expects economic growth to have contracted by seven per cent when June quarter figures are released next month, the biggest decline in decades.

The Reserve Bank has kept the cash rate at a record low 0.25 per cent since March and 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.

Leading economist Craig James believes the reserve bank has largely run out of options to boost economic activity, although says it still plays a key role in driving the economic debate.

But Dr Lowe did not rule out a policy of negative interest rates, despite saying it was unlikely.

“In a world that is so uncertain and fluid, I don’t think it is prudent to rule it out,” he said.

Dr Lowe 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.

“I don’t think the cost benefit justifies negative interest rates.”

Labor MP Andrew Leigh said he was surprised the reserve bank was not actively considering negative interest rates as other central banks had.

“Australia’s relatively high exchange rate reflects the relative conservatism of the the RBA,” Dr Leigh told AAP.

I”m worried they’re putting bank profits ahead of jobs.”

Dr Lowe 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.”