, melbourne, 19 august. bis central bankers ’ speeches doubt that will not discourage some readers from using their rulers to measure the graphs and focus on revisions down to the nearest 0. 1 percentage point! also, some commentators will be tempted to draw attention to what they might describe as “ large ½ percentage point changes ” when the forecasts are revised, even though any such revisions may reflect much smaller adjustments if it is the case that the forecasts have merely crossed rounding barriers. 6 the key point i ’ d like to make here is that if we judge any forecast revision to be of substance worth noting, we ’ ll note it! to emphasise this point further, it is worth remembering that the available data are subject to a degree of measurement error. in the case of real gdp, for example, quarterly growth rates can easily be revised up or down by ½ percentage point or more in the first four years after the initial estimate ( graph 1 ). 7 the recent revision to gdp growth – of 0. 2 percentage points in the september quarter of 2015 – was relatively minor, though the data now suggest that gdp growth picked up in the second half of 2015 to be more in line with the strength that was apparent in a range of indicators of the labour market and business conditions at that time. starting points a critical element of forecasting is to have a sense of where the economy is now and in which direction it ’ s currently heading. this comes from carefully dissecting the incoming economic data in an attempt to disentangle signals from noise and determine the extent to which shocks will be long - lived or transitory. 8 in addition to publicly available data, we make use of information obtained from our business liaison program. we also use information gleaned from econometric models, which include both single - equation models of individual variables as well as larger models that attempt to capture the behaviour of multiple variables simultaneously. the various information sources that we use don ’ t always provide a clear message about where we are and where we are heading. indeed, it is naive to think that the truth can reside in a single source of data or a particular model. to an extent, this reflects the usual noise in the various types of information, as well as uncertainty about the strength of different economic relationships. combining information from a variety of sources, and models, typically results in more robust conclusions than relying exclusively on a single source. the behaviour of inflation provides a timely example. a wide range of information suggests

christopher kent : economic forecasting at the reserve bank of australia address by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, to the economic society of australia ( hobart ), university of tasmania, hobart, 6 april 2016. * * * accompanying charts can be found at the end of the speech i thank daniel rees, who provided invaluable assistance in preparing these remarks, and is the head of the bank ’ s new macroeconomic modelling section ( see below ). introduction let me start by thanking the university of tasmania and the tasmanian branch of the economic society of australia for hosting this event. today i am going to talk about economic forecasting, which plays an important role in policy deliberations at the reserve bank of australia ( rba ). it assists in interpreting economic developments and, because monetary policy typically affects economic activity and inflation with a lag, it is a necessary part of determining and communicating the appropriate stance of policy. i ’ m also going to discuss the results of an external review of our forecasting methods and processes, which we have just published, and our responses to the recommendations therein. our current approach to forecasting has been in place for some years. while it has served us well, we thought it was time to consider whether our methods and processes would continue to be appropriate and how we might improve upon them. to do this, we commissioned two eminent economists to conduct a review, professor adrian pagan of the university of sydney and dr david wilcox of the federal reserve board of governors. 1 the existing approach to forecasting at the rba the process of economic forecasting actually involves a wide range of activities. the most familiar relates to the construction of forecasts that reflect our best estimates of future economic outcomes. 2 each quarter in the statement on monetary policy, we publish forecasts for australia ’ s major trading partners ’ gdp growth, as well as australia ’ s terms of trade, gdp growth, unemployment rate and inflation over the next two - and - a - half years. however, these numbers are just a summary of an extensive process in which our analysts incorporate incoming data, assess the relevance of new events, construct forecasts for a large number of economic variables, analyse various scenarios and consider a range of key risks to the outlook. all of this provides a useful framework to guide policy deliberations and then communicate those decisions. this process may lead us to revise the economic outlook – either in response to unexpected developments or