Forecasting Key to Monetary Policy Decisions

The Reserve Bank of New Zealand Bulletin, March 2013 | Go to article overview

Forecasting Key to Monetary Policy Decisions


15 March 2013

Making sense of what is going on in the economy and forecasting future economic conditions are essential for making good monetary policy decisions, the Reserve Bank's Assistant Governor John McDermott said today.

In a speech to the Financial Services Institute of Australasia, Dr McDermott said forecasting can be difficult, because the economy is never static and monetary policy actions take time to influence inflation. But forecasting is an important element of the Bank's communication of policy and risks.

Dr McDermott said there is no single "correct" way to look at the economy, and the Bank draws on a range of official data, statistical models, surveys, business visits and market monitoring to shape its view of the economy.

"The forecasting framework includes some fundamental economic principles to anchor our analysis and dialogue. These include the big lesson from the 1970s experience, that you can't sustainably get higher growth by tolerating a bit more inflation, and that to try to do so will eventually cause high and variable inflation, and damage the economy."

Currently, monetary policy faces some big forecasting challenges, including the treatment of the persistently high exchange rate, high household debt and accounting for the substantial Canterbury rebuild. …

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