Reserve Bank governor Philip Lowe says interest rates are a more nimble tool for managing demand in the economy compared to government policy.
Speaking at a parliament committee hearing in Canberra, Dr Lowe said aggregate demand growth was too strong and that interest rates are a "blunt" but "nimble" policy tool to bring inflation under control.
"The Reserve Bank board meets every month and we can take decisions every month based on the flow of information," he said.
"The received wisdom, over recent time, is that fiscal policy, most of the time, is not as effective at managing the cycle."
Dr Lowe said policy interventions must be debated in parliament, which takes time.
"Fiscal policy, most the time, should be dealing with the structural issues and structural budget position, and - except for in extraordinary times - it's not the best tool to use to manage aggregate demand," he said.
"Interest rates, for all the faults and all the problems, we have is the one nimble tool."
His comments follow another 25 basis point interest rate hike last week, taking the cash rate to 3.35 per cent.
The RBA has indicated that further rate rises will be needed to rein in spiralling inflation, which grew by 7.8 per cent annually in the December quarter.
The former head of the central bank has criticised the credibility of the institution following some flawed interest rate predictions.
Bernie Fraser, who led the RBA for seven years before his tenure ended in 1996, said it would be better if the central bank flagged the possibility of further rises while watching for the impact of the existing interest rate hikes rather than giving firm predictions.
"The market has sort of jumped on and interpreted this as the likelihood or near-certainty of another three or four increases to interest rates," he told ABC radio on Wednesday.
"And that's unhelpful and doesn't provide the kind of confidence that the bank should be striving to enlist with the community."
Treasury secretary Steven Kennedy, who has a seat on the RBA board, said criticisms of interest rate decisions should be applied to all board members.
"The criticisms or otherwise of the interest rate decisions apply to the whole board, not just the governor, because it's the board that makes the decisions," he told a parliamentary committee on Wednesday.
Dr Kennedy said he would not speculate on the trajectory for future monetary policy decisions and the governor was responsible for providing communications on the matter.
The future of the Reserve Bank's leadership has also come under question ahead of the treasurer's decision on whether to extend his term in the second half of 2023.
Several MPs, including Labor backbenchers, have questioned Dr Lowe's tenure based on the RBA's predictions issued during the COVID-19 pandemic.
Treasurer Jim Chalmers has refused to comment on Dr Lowe's future as governor.
Mr Fraser said the Reserve Bank had built up substantial trust and credibility with the Australian public during the past three decades, but the "miscalculation or misjudgement" on the forecast had jeopardised that reputation.
"Those people who are acting on that forecast have been severely burned ... and that has ... damaged credibility," he said.
"That is a worry because the independence of the central bank and the credibility of the central bank is absolutely essential."
The RBA is also subject to an independent inquiry, with the findings due next month.
© AAP 2023