Jun 06

The Reserve Bank’s Other Trigger

In today’s Australian Financial Review, David Bassenese wrote that the Reserve Bank needs to “put up rates or shut up”. Whilst we all know that the Reserve Bank uses the interest rate lever to adjust our level of economic activity, the other method they have up their sleeve is what they say. If the Reserve Bank indicates, whether via speech or monetary policy statement, that it is going to increase interest rates because it expects inflation to rise, then this statement alone can have an influence on the way we behave. For example, we may be reluctant to borrow money to purchase a home or car if we know rates may be higher and perhaps the banks may get a little tougher in their lending criteria if they also believe rates are going up. It doesn’t necessarily have to put interest rates up for our behaviour to change. The flpiside is that it can’t be all talk, as after a while we’ll stop believing it… we all know about the boy who cried wolf.

Because of this second lever, I disagree that the Reserve Bank needs to “put up rates or shut up”.  The Reserve Bank should state its intention based on the expected economic behaviour of this country and if there’s a chance our behaviour doesn’t match their expectations then we should be punished or rewarded appropriately.

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