represents how market participants have interpreted the incoming economic data and events and how they think the bank will respond. the blue line shows how the bank revised its 1 - year ahead 90 - day interest rate projection from one statement to another. the blue line gives an indication of how the bank interpreted new economic events and the subsequent monetary policy response. generally, market participants change their outlook for interest rates in a similar way to the bank as new economic and financial information becomes available. the majority of the move in interest rates occurs before we have provided financial market participants with our interpretation of new events. this suggests market participants have a good understanding about how new information changes the bank ’ s own outlook, the conditionality of the bank ’ s projections and the bank ’ s reaction function. conditional commitment in action – changes in the policy outlook since 2014 the changes in the bank ’ s policy stance since the beginning of 2014 provide a good illustration of the conditional nature of forward guidance in practice. at the march 2014 statement, the 90day interest rate had averaged 2. 85 percent in q1 2014, and the bank was projecting it to rise to 5. 5 percent by q3 2017. however, a number of factors led to a moderation in the outlook for inflationary pressure over the quarters that followed. both cyclical and structural aspects of the new zealand economy evolved in unforeseen ways. these events included significant falls in the prices of oil and new zealand ’ s commodity exports, a stronger - than - expected exchange rate, weaker - thanexpected capacity pressures ( and stronger potential growth ), and weaker non - tradables inflation. despite these developments, by the december 2015 statement the bank was projecting even stronger economic growth than had been expected in march 2014 ( figure 2 ). this is not because the fundamental outlook had improved, but because this new information led the bank to change its outlook for monetary policy and provide more stimulus to the economy. indeed, the december 2015 statement projected that the 90 - day interest rate would be 2. 6 percent in q3 2017, almost 300 basis points lower than was forecast in march 2014 ( figure 3 ). given the weaker starting point for inflation, stronger growth was needed to bring inflation back to target. however, as discussed, this projection for stronger growth is conditional on a set of certain assumptions, and the bank may need to change its activity and policy outlook if new events were to unfold. the changes in the 90 - day interest rate projection over this

john mcdermott : forward guidance in new zealand speech by dr john mcdermott, assistant governor and chief economist of the reserve bank of new zealand, to the goldman sachs annual global macro conference 2016, sydney, 4 february 2016. * * * accompanying figures can be found at the end of the speech. introduction i would like to thank goldman sachs for the invitation to speak here in sydney today. it is a pleasure to take the trip across the tasman to be part of your annual macro economic conference. the focus of my comments today will be the reserve bank of new zealand ’ s approach to forward guidance, and in particular, the publication of an endogenous outlook for the 90 - day interest rate. i ’ ll touch on the benefits of this approach and how we aim to minimise the potential costs. i ’ ll highlight the importance of understanding the conditional nature of our forecasts. and i ’ ll finish by providing an illustration of the bank ’ s conditional forward guidance in practice. over the past few decades, transparency has become much more valued in the conduct of monetary policy. transparency can improve the effectiveness of monetary policy, and increases the accountability of the central bank. transparency is a value held in high regard at the reserve bank of new zealand, which is seen as one of the most transparent central banks in the world. 1 this value is applied to the way we conduct forward guidance, where the bank is very open about its monetary policy outlook. 2 in new zealand, this includes the publication of a forward projection for the 90 - day interest rate, comments on the outlook for policy, discussion of risks in our monetary policy statement and the presentation of alternative scenarios. the bank is one of only a handful of central banks that publish forecasts for the short - term interest rate. 3 this is a practice we have maintained since 1997. the publication of the 90 - day interest rate projection can improve the effectiveness of monetary policy in a number of ways. first of all, informing the public on our thinking about the transmission of monetary policy and a possible path of for interest rates can help individuals and businesses make more informed decisions. 4 there are times when the bank will know more about the economic situation and outlook than does the public or financial market participants. every so often this will relate to dincer and eichengreen ( 2014 ), “ central bank transparency and independence : updates and new measures ”, international journal of central banking, vol. 10, no. 1, pp 189 – 253,