Central bank jawboning is effective only with credibility

The Reserve Bank of Australia has a “harder road to hoe” than the Federal Reserve in terms of jawboning the economy downwards as it is “losing credibility”, according to QIC’s chief economist.

Speaking at the Australian Superannuation Investment conference, held by the Australian Institute of Superannuation Trustees (AIST) on the Gold Coast, Dr Matthew Peter, QIC chief economist, said central bank jawboning was “incredibly effective”, as long as the central bank had credibility.

He said RBA governor Philip Lowe’s previous messaging that interest rates would remain at around zero until 2024 was effective jawboning because it was believed by the market.

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“So it is incredibly powerful, but it's only powerful as long as the central bank has credibility,” Peter said.

“At the moment, the Fed still has credibility in my opinion. The RBA less so. That’s where the RBA gets itself into difficulty.”

Peter said the RBA had lost credibility after being forced out of a zero-interest rate position, losing yield curve control and anchoring the three-year yield to zero.

“They gave really mixed messages about where they were taking interest rates after that, instead of just saying, ‘yeah, we've got to tighten…’ which they should have done last year. They’ve dilly-dallied around.”

Peter was cautiously supportive of the ability of central banks to facilitate a soft landing but said the US would have an easier experience at achieving it than Australia.

“When we look at the consumer, the balance sheets are really strong. In the US and Australia, net wealth is at an all-time high. And you say ‘but aren’t equities rolling up and bringing net wealth down?

“It’s bringing it down in the US from 800% of disposable income maybe down to 740%. Prior to COVID net wealth was sitting at 700%.

“Savings rates are high. In the US the amount of deposits that households are holding is at $14 trillion - up from $10 trillion before COVID.

“You're also looking at very low debt levels in the US - the household debt to income ratio there is 75%.

“So you've got a lot of conditions that are very supportive of being able to support the household sector both in the US and in Australia - perhaps less so in Australia.

“I think that they will back off on rate hikes once they see the economy starting to slow in inflation stabilising.”

Peter said a soft landing in Australia would be a “hard road to hoe” partly because Australian consumers were in a slightly worse position and partly because the RBA was losing credibility.

“So they've got to really be strong now in terms of their jawbone, let’s call it, to the market.”




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