The Reserve Bank chief says Australia should not talk itself into a recession and it is better able to defend itself against the global economic downturn than other countries.
But the comments from RBA governor Glenn Stevens came as new data released on Wednesday suggested there is a great risk Australia will follow the world's leading economies into recession in the first six months of next year.
"The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness," Mr Stevens told the Committee for Economic Development of Australia annual dinner.
He said nations with tight monetary and fiscal policy settings were better able to cope with the current economic climate.
"Those countries which went into this episode having practised disciplined macroeconomics policies over many years, and I would include Australia in this group, will tend to be the ones which find themselves with the most scope to move in an expansionary direction."
The RBA has cut the official cash rate by 200 basis points in the past three months.
Economists expect it could be reduced by a further 75 basis points when the central bank meets on December 2, given the ongoing weakness of local economic data.
Mr Stevens said policymakers must remain ready to act promptly to support the financial system and sustainable economic activity, and governments must consider worthwhile public investment "even if that involves some prudent borrowing".
The Westpac-Melbourne Institute Leading Index slumped to an annualised growth rate of just 1.1 per cent in September from 3.5 per cent in August.
The index points to the likely pace of economic activity three to nine months into the future.
"This is a very disturbing fall," Westpac's chief economist Bill Evans said.
The fall in September was the largest month-to-month percentage point fall since the mid-1980s - greater than in the 1990-91 recession - and points to a very weak growth outlook for at least the first half of 2009.
"Growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative," Mr Evans said.
An economy is deemed to be in recession when it posts two consecutive quarters of negative growth.
However, RBA assistant governor Malcolm Edey told an earlier conference that the central bank's decision to cut rates quickly, the federal government's $10.4 billion fiscal stimulus package and a weak Australian dollar would help soften the impact of the crisis.
Last week, the RBA cut its economic growth forecast to just 1.5 per cent by June next year, undercutting Treasury's trimmed 2.0 per cent prediction.
Treasury, however, took the unusual step of including market expectations of further interest rate reductions in its outlook.
Secretary to the Treasury Ken Henry defended the forecast last week after the federal opposition called it "suspicious".
Still, comments by Dr Edey suggest all the argy-bargy that surrounded the forecasts may have been for nothing.
Dr Edey emphasised that any forecasts in the current environment were subject to a great deal of uncertainty.
"Not least because the situation in world financial markets is still changing rapidly," Dr Edey told delegates at the Australia and Japan Economic Outlook Conference in Sydney.
Most of the recent economic data indicates a slowdown in growth but most were calculated before the start of the latest financial meltdown that followed the collapse of US investment bank giant Lehman Brothers on September 15.
"So they are of limited value in assessing the impact of the latest round of financial turmoil, which dates from mid-September," he said.
