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Forecasts help understand evolving trends

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Wellington, May 15, 2017

Forecasting is a valuable part of the monetary policy process, helping the Bank plan for the future, communicate its current understanding and intentions, and react to unexpected events, Reserve Bank Assistant Governor and Head of Economics Dr John McDermott said today.

Speaking at a meeting of the New Zealand Manufacturers and Exporters Association (NZMEA) in Christchurch, Dr McDermott outlined the reasons why the Bank regularly produces and publishes forecasts and Official Cash Rate (OCR) projections.

Precise thinking

“Forecasting is not supposed to be prophecy; rather, it is about being precise about our thinking. It requires the Bank to be rigorous, unbiased, and open to new ideas in formulating and implementing monetary policy. Being numerically precise about our view of the future allows us to test ideas, which in turn accelerates our ability to learn and understand what is going on,” Dr McDermott said.

He said that the economy is populated with thousands of households and businesses responding to their own particular circumstances and opportunities, and therefore the range of possible outcomes is vast.

Because of the complexity of the economy and the developments continually affecting it, the Bank’s forecasts are inevitably subject to change.

“The Bank’s forecasts are highly conditional on the information currently available and are revised when important additional information comes to light. In recent Monetary Policy Statements the Bank has published scenarios to illustrate how the forecasts would change should the economy develop differently,” Dr McDermott said.

A Good Guide

Forecasts also help people form expectations of the future and therefore guide current actions. By building people’s understanding of how the Bank is likely to react to news, and by explaining its forecasts and policy stance, the predictability of monetary policy decisions is enhanced and policy uncertainty is reduced.

More information: The value of forecasting in an uncertain world

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Dr John McDermott

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