Australiasian Reserve Banks: Do they know something we don’t?

Well to be honest, the Reserve Banks know a lot of things I don’t – but it appears that maybe they have some access to information that I am not aware of.

Yesterday, the Reserve Bank of Australia turned even more dovish than it had been earlier – spelling out the fact that it was going to start cutting interest rates soon (here). Similarly, the RBNZ began cutting from July 24th in a statement that seemed to indicate that interest rates were going to be progressively cut over the rest of 2008 (here).

Now both Bank’s admitted that inflationary pressures were rife – however, both banks have also presumed that wage pressures and inflation expectations will moderate. This is the kicker – price and wage claims must moderate, and both Bank’s appear to have a reasonable amount of confidence that they will.

In both countries the labour market is not moderating in line with a sufficient enough recession to ensure this (look at hours worked here) – fundamentally, hours worked cooled before the 1991/92 and 1998 recessions – we still haven’t seen that here. Furthermore, both countries have recorded historic positive terms of trade shocks. However, they are both assuming that the terms of trade will reverse significantly, and that the labour market will cool sharply. Now these are hefty assumptions, focusing on one side of the potential risks rather than “balancing the risks”.

Given that they understand this more than most it gives me the impression that they have access to a more accurate pool of “risks” – and they are infact balancing risks given this.

Ultimately, this makes me nervous. What sort of risks might the Bank’s know about that we don’t which change the associated risk profile? Are the retail banks in trouble? Are a number of large firms stuck in the red? Is there a high probability of another drought next year?

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