Ian Macfarlane helped steer the economy through the Asian Financial Crisis of the late 1990's and the Dot.Com crash of the early 2000's, but the former Reserve Bank governor concedes the present situation is "most perplexing".
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Mr Macfarlane, who headed the central bank for 10 years until 2006, believes any further interest rate cuts will have very little power to do anything useful.
The Reserve Bank cut the official cash rate to a new record low of just 0.75 per cent this week, the third reduction in a matter of months
"Too much faith is being placed in the expectation that monetary policy can do things that it can't do," Mr Macfarlane told The Weekend Australian newspaper on Saturday.
"It's done everything it can do. Once interest rates are negligible, further cuts would seem to have very little power to do anything useful."
Even so, financial markets are predicting a further cut in the cash to 0.50 per cent by the end of the year and possibly a further move to 0.25 per cent in early 2020.
Mr Macfarlane, who was named Central Banker of the Year in 2002 by Euromoney magazine, believes the current era is the "most perplexing and difficult for monetary policy ever".
"At least during the GFC you knew what had to be done," he said.
The federal government has so far shunned the idea of undertaking any further stimulatory measures to lift economic growth, pointing to the personal income tax cuts that have been legislated and are being rolled out, as well as a $100 billion pipeline of future infrastructure projects.
However, despite the income tax cuts that began on July 1 and interest rate cuts in June and July, retail spending for August in data released on Friday showed only a modest 0.4 per cent increase.
Addressing the party faithful in Tasmania on Saturday, Prime Minister Scott Morrison admitted he wants to see a stronger economy at a time when there are many pressures globally.
"I'm pleased to say though, that when you compare where Australia is to the other advanced economies of the world, we are punching well well well above our weight, and it's not by accident," Mr Morrison told the Liberal State Council in Devonport.
"It's not luck, it's a result of good stewardship, planning, management and getting the right settings in place."
However, Opposition Leader Anthony Albanese said the Reserve Bank cut the cash rate below one per cent because it thinks that economic growth is not good enough.
"They want the government to step up and bring forward infrastructure investment," he told reporters in Sydney.
He said consumer demand is low, economic growth forecasts have been cut, productivity is going backwards and wages are not keeping up with the cost of living.
Mr Morrison said the first call on the federal budget is supporting rural and regional communities through the drought.
"That is the most important call on our budget at the moment," he said.
However, Mr Albanese said the "alleged" $7 billion set aside for drought assistance is "simply a mirage"- $5 billion of which is just shifting money from one fund to another, rather than being new money.
Even then, he said the funds do not flow until July 2020.
"The government needs to do more to assist those farmers who are doing it tough and the communities that are doing it tough in this drought," the Labor leader said.
Australian Associated Press
