Amid continuing signs the retail sector is struggling, Philip Lowe admitted there were already signs of a "cross-over" between Australians using last year's interest rate cuts to get their finances in order and people borrowing more to get into the property market.
The RBA sliced official interest rates to a record low of 0.75 per cent last year as it sought to drive down the unemployment rate and lift wages growth. Since it started cutting in June, house prices have rebounded, with Sydney and Melbourne values lifting by almost a percentage point a month.
At its most recent meeting earlier this month, the bank noted that while lower interest rates would help the economy grow faster, they could also increase financial risks.
Dr Lowe, addressing the Australia-Canada economic leadership forum in Melbourne on Thursday, said businesses should be taking advantage of very low interest rates to help expand their operations and make investments that would deliver their shareholders long-term wealth.
Instead, private investment was "very low" while public investment was only average.
He said both governments and private firms had to understand that very cheap money would be the economic norm for a long time.
"It's quite likely we're going to be in this world of low interest rates for years, perhaps decades, because it's driven by structural factors in the global economy," he said.
But Dr Lowe said there were risks with very low interest rates, particularly as many Australians had taken on large mortgages to buy "very expensive" houses.
He said the RBA had to take into account the vulnerability caused by "structurally" high house prices and high levels of debt to income.
Industries across Australia are feeling the pinch as the deadly coronavirus affects exports and travel.
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"Last year, lower interest rates I think did help people repair their balance sheets," he said. "Perhaps we're moving to a cross-over point where the lower level of interest rates are encouraging people to borrow yet even more which could create a vulnerability down the track.
"We've made choices which give us structurally high housing prices and structurally high levels of debt relative to our income. That's what we've done and it's created a vulnerability because we've got a lot of debt on our balance sheets relative to income."
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Australian Bureau of Statistics figures this week showed the average mortgage in NSW had now reached a record $612,000, up by $112,000 over the past 12 months. In Victoria, the average was almost $518,000 after jumping by $64,790 through 2019.
Mortgage holders appear to be diverting their spending away from the retail sector to cover their repayments.
NAB's quarterly survey of the small- and medium-sized business sector released on Thursday showed a drop in conditions and confidence for many operators in the final three months of last year.
The worst hit were the smallest firms, particularly those in tourism-related and discretionary focused areas. Small firms were most negative about the prospects for extra staff in coming months.
NAB chief economist Alan Oster said it remained difficult for businesses to woo customers.
"The result for the retail and other discretionary consumer sectors such as cafes, accommodation and restaurants are quite concerning," he said.
The survey pre-dated this year's bushfires and the recent coronavirus outbreak.
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