How the RBA ‘manipulates’ Aussies

Jawboning, as it’s known, refers to when powerful figures such as politicians or central bankers use their speech try to influence behaviour and achieve a desired outcome, typically in the economy.

This week, the Reserve Bank raised the official cash rate for the 10th consecutive month to an 11-year high of 3.6 per cent.

The next day, Dr Lowe tried to calm the situation, telling a business conference that the board was “closer” to a rate pause but warning inflation was “still too high” at 7.8 per cent.

February’s statement from the governor suggested looming rate hikes plural, whereas Tuesday’s took a softer tone that could be interpreted as only one.

“The RBA wanted to ‘frighten’ borrowers in February,” tweeted ABC business reporter David Taylor. “It’s now trying to ‘ease’ their concerns. Economists call it jawboning. It’s also psychological manipulation – all central banks do it.”

AMP Capital chief economist Dr Shane Oliver likened jawboning to a stern parent telling off their child.

“It refers to the concept of trying to achieve an economic outcome, but you don’t necessarily want to have to change interest rates as dramatically as might be required, so you appeal to people’s psychology, if you like,” he said.

“You threaten to do something more aggressive if you don’t behave. It’s a bit like a parent threatening to send their kid to bed early hoping that will stop their bad behaviour.”

Central banks like the RBA “mainly use it by threatening to be more aggressive on interest rates than they really want to be”.

“They try to sound really tough, such that people generally expect interest rates to go up a lot – that causes their behaviour to change to achieve the outcome the central bank wants without necessarily having to do it,” Dr Oliver said.

He said it could be argued that in February the RBA’s unexpectedly hawkish tone “might partly be jawboning” to “convince people to slow down their spending”.

In that way, while it’s generally believed central banks have just one lever to pull to control inflation – and leaving aside newer innovations like quantitative easing, or pumping money into the economy – it’s more like one-and-a-half.

“The general consensus is that it’s a reasonable thing to do, because if they can achieve a return to the inflation target by sounding tough, you could argue that’s a less painful way than jacking rates up further,” Dr Oliver said.

“Because you have the effect of people lowering their spending but you haven’t actually taken their disposable income away.”

The question of jawboning came up during Dr Lowe’s grilling before parliament last month, when he was asked why, if the RBA was going to raise rates, it doesn’t just get it over with quickly rather than gradual 25 basis point increases.

“The counter argument Lowe put was that you get an announcement effect by having multiple rate hikes over time, which helps your jawboning,” Dr Oliver said.

“Economists and the media give it more prominence, so you get a bigger impact on people’s psychology than if you just do one big move.”

At the same hearings, however, the RBA conceded that there was not a lot of hard evidence that jawboning worked.

“The RBA official said well no, there’s not really a lot of evidence on this,” Dr Oliver said.

“But I think it’s generally accepted by central banks that it does help, that’s why so much attention is placed on forward guidance.

“I would tend to think combining jawboning and the announcement effect with the rate moves themselves is probably a better way to do it than just hiking rates.”

He argued that in the late 1980s, rates might not have had to rise so quickly if the RBA had used this strategy.

“In the late 1980s they hiked rates but they didn’t tell us,” Dr Oliver said. “It was raised from about 10.5 per cent to over 18 per cent but the RBA didn’t come out and announce it.”

The central bank did not start making monthly interest rate announcements – officially called the “cash rate target” – until 1990.

“You had to guess based on the overnight,” said Dr Oliver. “Everything prior to 1990, the cash rate was just the overnight interbank rate.”

Ironically, Dr Lowe’s infamous assurance that rates would not rise until 2024 may have been an example of jawboning that worked a little too well.

At the time, with rates at record lows, the government was trying to convince people to go out and spend to help the economic recovery.

“To some degree it backfired and people got annoyed when rates went up earlier than that,” Dr Oliver said.

As a result, as Dr Lowe has admitted, the RBA’s credibility took a hit – which could in turn make future attempts at jawboning less effective.

“Its success or otherwise depends on the credibility of the institution and the person who’s doing the jawboning,” said economist Saul Eslake.

“When we’re talking about a central bank, that in turn depends on the independence that person has from the government of the day and his or her institution’s track record.”

Mr Eslake said in the past the RBA “would have had a higher degree of credibility and its jawboning would have been effective”.

“But to use Dr Lowe’s own words, the RBA has taken a hit to its credibility over its infamous prediction that rates would remain on hold until 2024,” he said.

“So it’s unlikely to be as effective as it might have been.”

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