Opinion: Accountability for past forecasts, or just new forecasts?

Opinion: Accountability for past forecasts, or just new forecasts?

Asia Pacific Risk Management's Roger J KerrYour central bank Governor, Dr Alan Bollard is paid a handsome salary to forecast the NZ economy accurately (within acceptable tolerance limits) so as to conduct monetary policy to keep inflation, interest rates and the NZD currency value relatively stable. In this manner business can plan and invest with some confidence. If he achieves those objectives, the economy is given a reasonable chance of growing and thus our combined wealth/living standards increasing.

It is a tough job, as international events and developments outside the influence of monetary policy (e.g. oil prices and credit crunch) have a massive impact on the performance and direction of the NZ economy. Sudden changes to the RBNZ's forecast for the economy (as we saw in June) can cause dramatic shifts in interest rate and exchange rate levels. The plunge in both the Kiwi and swap interest rates seen in recent months reflects the sudden change of view from Alan Bollard and his team. The rapid lurch from a tight monetary policy stance to a path towards "neutral" settings has caused extreme volatility in the financial markets, thus not meeting the stability objectives. Let's hope that in Thursday's Monetary Policy Statement there is some credible explanation as to why monetary policy was required to be adjusted so rapidly. The facts are that the RBNZ did not see the economic recession we are now in until it was staring them in the face in June. Quality monetary policy management requires looking ahead 12 to 18 months and accurately forecasting the likely economic environment and how that will affect inflation. The RBNZ economic forecasting performance has been poor over recent times, but do not expect any critical evaluation of this in Thursday's statement. As always, they will just produce a new forecast. Forecasting how the NZ economy will be travelling in 12 months time cannot be that hard. Our view is that the export-led recovery will be well under way with GDP growth returning to positive. Household finances and balance sheets in the cities will still be depressed, but overall the economy will be expanding. The major risk to this outlook is that the world economy weakens further and our agricultural commodity prices fall away. This scenario would prolong our recession and potentially send interest rates below the 6.50% floor we currently expect. I am encouraged that the economic leaders in the US such as Harry Paulson and Ben Bernanke understand the situation and have demonstrated decisive action to ensure that the US economy (and the world economy) does not go into recession. The probability of a global economic recession next year is not that high in my view. For the record, my interpretation of what represents "tight", "neutral" and "loose" monetary policy setting in New Zealand is as follows:- Tight    = 90-day interest rates between 7.50% and 10.0% Neutral = 90-day interest rates between 6.00% and 7.50% Loose   = 90-day interest rates between 4.50% and 6.00% Some banks are now forecasting 90-day rates to go below 6.00% on this easing cycle. They either see a prolonged/deep recession or the CPI heading below 1.00%.  Neither appear likely to me. ------------------ *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com.

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