NZ central bankers are not fortune tellers, says assistant governor McDermott

 New Zealand's central bank monitors a wide range of data to gauge the current state of the economy and develop forecasts but "we are not fortune tellers," Reserve Bank assistant governor and head of economics John McDermott said in a speech to the New Zealand Manufacturers and Exporters Association in Christchurch.

McDermott outlined the reasons why the bank regularly produces and publishes forecasts and official cash rate projections, noting they provide "a 'clear line in the sand' as to the bank's thinking."  The forecasts allow commentators, market participants and others to understand the bank's monetary policy stance, he said.  The goal is to be "precise" in its thinking, he said.  The central bank publishes a range of forecasts in four monetary policy statements a year, including where it sees interest rates over a three-year period. 

New Zealand's central bank does not publish a "dot plot" like the US Federal Reserve or a fan chart showing the range of possible outcomes for interest rates. "While this approach shows the extent of uncertainty, it does not help people understand how the central bank's forecasts may evolve if some of the contingencies change," he said.

As a result, the central bank has opted to publish a range of potential scenarios. On Thursday last week, for example, the central bank left the cash rate 1.75 percent and also kept the rate track unchanged, saying a recent jump in consumer prices may only be temporary. The bank is not expecting to lift interest rates until September 2019, according to its forecasts.  However, it also presented two alternative scenarios, one where rates would move higher than the forecast and one where they would be lower given that "numerous uncertainties remain and policy may need to adjust accordingly."

According to McDermott, "the bank’s forecasts are highly conditional on the information currently available and are revised when important additional information comes to light." He underscored that good forecasters are careful, curious and comfortable with numbers but "crucially when the facts change they change their minds."  

He said the central bank's decision to lift rates in 2014 and then unwind those rate increases is a good example of the pitfalls of forecasting in a "radically uncertain" world.  The bank opted to lift rates by total of 1 percent points at successive reviews in the first half of 2014 given strong economic growth, solid terms of trade, robust construction activity and the fact that immigration was boosting housing and consumer demand. However, by September 2014 it became apparent that things weren't evolving as expected, he said.  It eventually cut the rate over the course of 2015 and 2016 to 1.75 percent in November last year, where they have remained ever since.

"Today, in May 2017, the most likely scenario is for the official cash rate to remain stable for some time, although uncertainty remains," said McDermott. 

News that the central bank did not rejig its forecasts last Thursday to show it tightening sooner than was forecast took markets by surprise, with the New Zealand dollar dropping by 1 US cent. Most economists expect the bank to begin lifting rates sooner than it is forecasting. 

(BusinessDesk)