In a speech to the Manawatu Chamber of Commerce, he said the bank would regularly review and refine its decision-making process to help it better handle economic uncertainty and improve the quality of its policy decisions.
“Each OCR decision and Monetary Policy Statement publication is complex involving many staff from across the Bank. The significant amount of background work reflects the uncertainty we face when setting monetary policy to achieve the objectives of the Policy Targets Agreement,” he said.
“As one example of this uncertainty, major economic data are often released with a significant lag, and remain subject to revision for some time. This makes interpreting even the current economic environment difficult.”
McDermott said the bank has adopted a process to help deal with this uncertainty and improve the quality of its monetary policy decisions. Two important elements were committee decision-making and the regular review of the bank’s forecasting process.
“The bank has used committees in its monetary policy decision making for many years. Historically, their use has been most prevalent in policy discussion and advice. In 2013, the bank maintained the advisory role of its committees, and strengthened the role of committees in making a monetary policy decision. The Governing Committee, comprising the bank’s four governors, was established with the committee being responsible for monetary policy decisions.
“These changes mean the bank now relies less on the single decision-maker model. Making a decision by committee allows the consideration of a greater range of viewpoints.”
McDermott said reviews of the bank’s forecast performance also help to update its understanding of economic relationships, evaluate risks to the current outlook and identify areas where accuracy can be improved. He said the bank would always make forecast errors because of the uncertainty involved in assessing the state of the economy and its outlook.
"For example, the vast majority of forecasters were unlikely to have been able to accurately predict the sharp decline in oil and export commodity prices that occurred over 2014 and 2015 – one factor that has led to current low inflation," he said.
“Since the financial crisis, inflation has been weaker than forecast, and the bank has continually reviewed its forecast performance over this period. Recent research has shown that the bank’s forecast performance has been reasonable when compared to a number of external and model-based benchmarks. This suggests that there were no obvious major sources of new information that the bank could have used from these benchmarks in its decision-making.
“The persistent period of weaker-than-expected inflation remains a focus for the bank, and the bank’s research programme is shedding light on the drivers of low inflation. Increasing our understanding of low inflation is a strategic priority for the bank.”
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