Negative interest rates in Australia extraordinarily unlikely: RBA Governor Philip Lowe

Australia's official interest rate isn't likely to go below zero, according to RBA Governor Philip Lowe.

At the Business Economics Dinner in Sydney last night, Lowe said negative rates are "extraordinarily unlikely."

A method used in Europe and Japan, Lowe said the tool is truly unconventional.

"Prior to the financial crisis, it was widely thought that zero was the lower bound for the policy interest rate.

"It was thought that if interest rates went below zero, people would hold their savings in banknotes rather than be charged by their bank to deposit their money.

Lowe said that having examined the international evident, it is not clear that negative interest rates has been a success.

"While negative rates have put downward pressure on exchange rates and long-term bond yields, they have come with other effects too.

"It has become increasingly apparent that negative rates create strains in parts of the banking system that can impair the ability of some banks to provide credit.

"Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

"In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement.

"A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Policy interest rates have been negative in Denmark, Sweden and Switzerland. Rates have been lowest in Switzerland, at minus ¾ per cent.

The only country outside of Europe that has had negative policy interest rates is Japan, at minus 0.1 per cent.

Lowe said Australia is not in the same situation that has been faced in Europe and Japan.

"Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position."

Lowe said low interest rates are not a temporary phenomenon and are "likely to be with us for some time."

The full speech was first published here.