daniel mminele : forecasts, errors and what we can learn from them keynote address by mr daniel mminele, deputy governor of the south african reserve bank, at the reuters economist of the year award, johannesburg, 5 august 2011. * 1. * * introduction good morning ladies and gentlemen. thank you to thomson reuters for inviting me to address you this morning and to celebrate with you your achievements in economic forecasting. may i take this opportunity to extend my sincere congratulations to the winner of this prestigious award to be handed out this morning, and also to congratulate all of the nominees present here today. i was very tempted to start off my remarks this morning by telling a little joke about economists, but decided against it, as i have been warned that an economist is someone who did not have enough personality to become an accountant. i promise to keep my remarks this morning quite brief. 2. economic forecasting tested during the crisis thomas kida1 noted, “... the amount of knowledge we have in a certain area will not help us predict what will happen if the events are inherently unpredictable. ” the recent global financial crisis and recession has proved to be a humbling experience for economists, financial market participants, policy makers, regulators and many others that derive their income from economic forecasting, understanding the world economy and that which governs it. the crisis was not foreseen by most forecasters, although there was a minority who had been warning of a pending disaster for some time. the failure to forecast the “ great recession ” caused the queen of england herself to ask why it had not been foreseen. the turmoil of recent years has prompted critics to maintain that many economic models, and particularly macroeconomic models based on rational expectations, have been proven to be fundamentally flawed. much of the criticism directed towards forecasting and macroeconomic analysts has probably been misplaced. it has never been so much about economic models being wrong, as it is about understanding that all models are limited – by definition – and that models that limit certain types of relationships will eventually fail when those relationships in the real world change. in other words, the right criticism is to say that economic models constructed in particular ways need to be used and understood in similarly particular ways. a model that does not include household balance sheets and what drives them will not tell you if you will have a household debt crisis. by the same token, a model that says that future wage inflation will be a perfect function of expected

##ity situation, continues to increase financial intermediation in the economy. allow me now to elaborate on these issues. the primary objective of the bank of albania is to maintain consumer price stability, which in quantitative terms is expressed as the annual increase in prices in the 2 – 4 % range and targeting the midpoint of 3 %. the bank of albania has successfully achieved this objective. different surveys show that economic agents report stable expectations for a low inflation. this consistent profile of our monetary policy has proved particularly useful in the last few years. we have had greater flexibility to implement a prudent easing monetary policy that promotes investment and consumption at home. over a several - month period, the bank of albania has made a number of decisions for cutting the key interest rate in the economy, the one - week interest rate on repurchase agreements, to its record low of 4. 25 %. it is a pleasure bis central bankers ’ speeches to note that the degree of pass - through to the economy is satisfactory and in accordance with the time lags in the monetary transmission mechanism. during this easing cycle, the annual increase in the inflation rate has remained under control and lek ’ s exchange rate has been stable. as a result, foreign direct investment and other portfolio flows have been stable, financing the major part of economic agents ’ current demand for foreign currency. macroeconomic stability is not an exclusive task of the central bank ’ s activity, but it reflects broadly the sharing of the same principle and harmonization of actions with fiscal policy. financial system ’ s stability, and the banking sector ’ s stability in particular, is the second main pillar of our activity. i can state that, in the recent years, we have devoted most of our capacities to meeting this objective. the challenges have been numerous considering that banking activity reflects not only the stability of the institution itself, but also the overall economic conditions. however, in close cooperation with the banking industry, we have succeeded in taking some measures that have enhanced the banking system ’ s resilience. as a result, despite the slower credit growth rate and lower credit quality, the banking sector continues to generate profit and remains well capitalized and liquid. in march, capital adequacy ratio stood at 15. 9 %, while liquid assets accounted for almost one - third of total sector ’ s assets. the banking sector has expanded its activity driven mainly by the performance of public deposits, which continue to grow at buoyant rates. we are, however