The Reserve Bank may create money to buy government bonds if it runs out of levers to boost the economy when it drops the official interest rates to 0.25%, its governor, Philip Lowe, has said.

Lowe told the Australian Business Economists dinner in Sydney on Tuesday that quantitative easing “could help” if further interest rate cuts and fiscal stimulus failed to boost the economy although it was “not on our agenda at this point in time”.

After three cuts to the cash rate this year to 0.75% and rates tipped to be cut to 0.25%, economists including Goldman Sachs chief economist in Australia and New Zealand, Andrew Boak, have suggested quantitative easing would be required.

They cite the fact the RBA has failed to meet the inflation target of 2-3% for 20 successive quarters, suggesting it may be forced to buy up to $200bn of government bonds to flood the financial system with money.

The creation of money lowers the borrowing cost for the government freeing up credit elsewhere in the system that can flow through to households and businesses that need loans to survive, or to make long-term investments that can stimulate the economy.

In the speech, Lowe argued that international experience suggests when there are problems on the supply side of the economy, structural and fiscal policies “will sometimes be the better approach” because monetary policy “cannot drive longer-term growth”.

Lowe suggested that financial markets in Australia are “operating normally”, with banks able to raise funds, so there was “no need … to do anything unconventional here” but it had “both the capacity and willingness to respond” if necessary.

The RBA’s current thinking was quantitative easing “becomes an option to be considered at a cash rate of 0.25%, but not before that” because at that point the official cash rate would effectively be zero.

Although it was “difficult to be precise”, quantitative easing could be used to reach for full employment and inflation “if there were an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives”, he said.

International experience “suggests that QE does put additional downward pressure on both interest rates and the exchange rate”.

Lowe canvassed a range of “unconventional” monetary policies tried overseas, effectively ruling out creating money to purchase private sector assets, for which he said there was “no appetite”, and suggesting negative interest rates were “extraordinarily unlikely”.

“If – and it is important to emphasise the word ‘if’ – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

“An important advantage in buying government bonds over other assets is that the risk-free interest rate affects all asset prices and interest rates in the economy.

“So it gets into all the corners of the financial system, unlike interventions in just one specific private asset market.”

Lowe said quantitative easing would lower the yields for government bonds by up to 0.2% and would signal the RBA’s commitment to keep the cash rate low for an extended period.

He said some analysts believed that at a certain “reversal interest rate”, cuts to the cash rate become contractionary, rather than expansionary, an idea the RBA took seriously.

“I am confident that here in Australia we are still a fair way from it.

“Conventional monetary policy is still working in Australia and we see the evidence of this in the exchange rate, in asset prices and in the boost to aggregate household disposable income.”

In August the Liberal MP Tim Wilson, chair of the house economics committee, challenged the RBA to justify the effectiveness of monetary policy, citing concerns reduced rates result in bigger repayments of the loan principal without boosting cashflow.

The Morrison government’s fiscal strategy so far has been to bring forward infrastructure spending, but it has rebuffed calls for further stimulus citing the existing income tax cut package and a desire to return to surplus.