john mcdermott : the role of forecasting in monetary policy speech by dr john mcdermott, assistant governor and head of economics of the reserve bank of new zealand, to finsia ( financial services institute of australasia ), wellington, 15 march 2013. * 1. * * introduction as is well known, the reserve bank act requires the bank to seek to maintain price stability, an objective similar in spirit to that of most modern advanced - country central banks. the governor is legally responsible for monetary policy decisions and they are made independently from the government. last week he explained in a speech how we make and communicate these and other important reserve bank decisions. 1 because the economy is never at rest, and monetary policy actions take time to affect inflation, forecasting economic conditions is an essential part of making these decisions. the forward - looking nature of monetary policy is reflected in the policy targets agreement ( pta ) between the governor of the bank and the minister of finance, which specifies the price stability target as “ future cpi inflation outcomes between one percent and three percent on average over the medium term, with a focus on keeping future average inflation near the two percent target midpoint ”. there are difficulties and uncertainties involved in assessing the current state of the economy and its likely future path. modern central banks therefore put a huge amount of energy into forecasting. events such as the global financial crisis and the canterbury earthquakes showed how we must be prepared to pivot, at times very quickly. reflecting this complex policymaking environment, the bank ’ s governing committee is advised by a team of about 40 economists and financial market analysts, including two external monetary policy advisers drawn from the private sector. this speech explains how forecasting fits into the monetary policy process. i ’ ll address the limitations and trade - offs involved in forecasting and how we manage these in monetary policy decision - making, and illustrate by discussing important issues in the current forecast. 2. the forecasting process and economic framework forecasting links the bank ’ s policy rate decisions and strategy to the requirements set out in the pta. the forecasting process follows a quarterly cycle with two ocr reviews, one of which is accompanied by the monetary policy statement for the quarter. through the quarter, we examine the incoming data, update forecast tracks and scenarios, and discuss policy risks. inputs to the process are many and various. we draw on official data, surveys and other information covering output, sales, employment, consumption, investment, exports, imports,

influenced by the positive impacts from various policies taken by the government and bank indonesia. inflation of foods and inflation of administered prices are expected to be stabilized, supported by expectation of improvement in the supply and distribution of food, assuming there will be no more policy of price increases that is of strategic nature. core inflation is expected to remain controlled due to the preservation of supply availability, stable rupiah exchange rate, and manageable inflation expectation. 75. for the prospect of banking in 2014, potentially fragile economy and interest rates increases need to be anticipated. in this sense, we forecast that credit growth from banking in 2014 will be within the range of 15 – 17 %, supported by growth in deposits along the same pace. in our assessment, that pace of credit growth is consistent with our efforts in balancing the economy. therefore, i expect the active involvement of the banking sector to adjust the target of credit growth in each respective bank business plan for 2014 to be more consistent with our effort in managing the economy towards a healthier direction. respected ladies and gentlemen, < medium - term prospects > 76. in the medium - term perspectives of 2015 – 2018, global economy is expected to grow at an average rate of 3, 9 %, driven by expected improvement of economic activities within the united states. prices of non - oil and gas commodities are expected to increase, albeit limited. nevertheless, prospect of global oil price needs to be carefully monitored because it can potentially increase due to ongoing global economic recovery. bis central bankers ’ speeches 77. indonesian economic growth is expected to reach 6, 5 % in 2018, if all transformation policies in the economy proceed according to expectation [ figure 11 ]. i take the view that those policies can improve the structural balance between demand and supply, while also easing the problem of current account balance structure. along the same line, economic growth could be stuck at 6 % if the transformation process does not proceed according to expectation. figure 11 medium - term economic prospect distinguished ladies and gentlemen < vision, mission and strategic values of bi > 78. in order to achieve those important targets, bank indonesia is transforming itself. we have launched our vision until 2024, which is to become a central bank that is to be a credible institution and the best central bank in the region. 79. we strive to be the best in the implementation of policy mix, macroprudential development, management of capital flow, initiative policies for the creation of regional financial safety net, financial inclusion and smes, and the