(Bloomberg) -- Australian central bank Deputy Governor Andrew Hauser warned against “overconfidence” in forecasting the economy and monetary policy, saying a more mature approach is to learn from errors and acknowledge how little is known about the future.
“Such learning can be difficult for those who treat forecast ‘misses’ as failures,” the Reserve Bank No. 2 said in a speech on Monday titled Beware False Prophets. “A more mature approach – and one long adopted by the RBA and other central banks – seeks instead to recognise that where forecasts are carefully constructed to make the best use of current data, ‘misses’ contain vital information about an intrinsically complex and stochastic world.”
The RBA’s recent forecasting errors on inflation showed price pressures had been somewhat stickier than expected, Hauser said. A similar pattern was seen in market expectations, suggesting the surprises weren’t limited to the central bank, he added.
Hauser didn’t directly address current interest rate settings in his speech in Brisbane. Instead he highlighted recent examples from the media and commentators who have written with “extraordinary certainty” about the outlook for the economy and the path of monetary policy.
The RBA last week held its key rate at a 12-year high and all-but ruled out an easing in the next six months, with Governor Michele Bullock saying there is still a risk that inflation will take too long to return to its 2-3% target. Even so, financial market pricing shows a 50-50 chance of a November rate cut while a December move is fully priced in.
“When we set interest rates, we have to look ahead – that is, make forecasts. That’s one source of uncertainty,” Hauser said. “Monetary policy works with long and variable lags – so our forecasts have to be medium-term, not short-term. That’s a second source of uncertainty.”
“And most importantly of all, the things we are forecasting – inflation and unemployment – are the complex, time-varying outcomes of the decisions and interactions between many millions of people, companies and other organizations.”
One way of tackling these uncertainties is to avoid placing too much reliance on point forecasts, Hauser said. Instead, he suggested framing policy decisions in terms of contingent hypotheses or judgments.
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