An extended drought would have a "significant" effect on the economy and food prices, says Reserve Bank Governor Philip Lowe.
Farmers are battling drought with the worst effects in NSW, southern Queensland and northern Victoria.
A new report by Commonwealth Bank has put the potential cost at $12 billion and warned of food price hikes.
Asked about the outlook, Dr Lowe said: "It depends very much on the scenario you paint for rainfall."
He said in 2002/03 farm output fell around 25 per cent knocking a full percentage point off Australia’s growth and leading to many rural workers losing their jobs.
As well, food prices rose by 4.5 per cent, because slaughter rates increase as droughts bite.
"The current drought is not as serious as that one and we all certainly hope it won’t be," Dr Lowe said.
In the short term, rural exports could rise as meat production increases, but at risk is an agricultural sector which accounts for up to 15 per cent of total exports.
Chief economist Michael Blythe said while drought may "take the edge" off total growth, the Australian economy was still likely to show a good result overall.
Australian Associated Press