The Reserve Bank may yet cut rates again but its boss warns that rate cuts have little firepower left to lift economic growth to the level Australia needs.
RBA governor Glenn Stevens painted a mildly positive picture of the nation when he fronted a House of Representatives economics committee hearing on Friday, saying the economy is growing at a modest pace despite the challenges of falling terms of trade and a wind-down in mining-sector investment.
Noting the RBA board had left the official cash rate unchanged at the record low of two per cent at its February meeting, Mr Stevens said the central bank "retains the flexibility to ease further, should that be helpful".
But he warned that in the past seven or eight years too much had been expected of monetary policy to keep delivering the long run of growth the world needs to sustain standards of living.
"Monetary policy globally has been asked to do something it can't really do," Mr Stevens said.
The bank boss noted that when Australia hosted the G20 summit in 2014 none of the initiatives agreed on to reach a two per cent growth target involved central banks cutting rates.
"They were all structural things to help make economies work better, help productivity, assist innovation etcetera. That's where prosperity comes from. It doesn't come from manipulating the price of money," he said.
Reaffirming the RBA's easing stance, Mr Stevens said it was "pretty unlikely we're going to be raising rates any time soon".
"The question will be should we sit or go back some more," he said.
Mr Stevens sought to ease concerns about volatility sweeping global markets amid ongoing concerns about world economic growth.
The most recent round of volatility this week has driven European and US stocks lower on fears of European bank instability.
There was post-GFC uncertainty around European banks with the spectre of funds drying up still an unknown risk, Mr Stevens said, but for Australian banks he saw no evidence funds were hard to obtain.
Mr Stevens said "gloom and doom" about a global recession was "overdone" even though the global growth outlook was less upbeat than six months ago.
Some commentators had described financial markets as "almost pricing as though there will be a global recession", he said.
"I think that might be a bit pessimistic really."
Mr Stevens said investors were choosing to focus on issues that had been present all along.
"I think what we are seeing in global markets at present is global markets are dropping their bundle," he said.
Mr Stevens said Australia's economy showed signs of gradual improvement and he had been surprised by the strength of employment, up by more than two per cent, while labour force participation had picked up and the unemployment had fallen below six per cent.
He warned, however, that the difficult discussions around tax reform had to be faced, saying it was up to the nation's political leaders to engage with the community about how expensive government services and tax relief were to be paid for.
"We're not heading to hell any time soon but there's an issue here over the medium term."
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