more readily we accept that our knowledge of the world is uncertain, the more willingly we acknowledge that perfect prediction is impossible, the less we will live in fear of our failures, and the more freedom we will have to let our minds flow freely. " 8 when an outturn is different from that forecast, the bank seeks to discover why, what it means for the outlook for monetary policy, and what we could do to make a better forecast next time. 9 we use our depth of experience to examine the data, distinguish the signal from the noise, and identify where to adapt our approach or where to maintain our existing views. for example, residential investment at the end of 2016 was considerably weaker than the bank had forecast. in seeking to understand this forecast error, the bank considered the composition of residential investment. we found that a sharp fall in transfer costs ( based on decreasing house sales ) was the cause of weak residential investment, rather than weakness in actual construction activity. accounting for this information should support better forecasts for this part of the economy in the future ( figure 2 ). 8 nate silver ( 2012 ), the signal and the noise : why so many predictions fail — but some don ’ t, penguin books. 9 for example see : kirdan lees, ‘ assessing forecast performance ’, rbnz bulletin 79 ( 10 ) june 2016 ; c j mcdermott, ‘ understanding low inflation in new zealand ’, a speech delivered to the bay of plenty employers and manufacturers association ( ema ) in rotorua, 11 october 2016 ; and geordie reid, ‘ evaluating the reserve bank ’ s forecasting performance ’, rbnz bulletin 79 ( 13 ) august 2016. figure 2 : residential building activity and house sales $ m 000s house sales residential building work put in place source : rbnz estimates. producing forecasts : avoiding biases and supporting robust outcomes forecasting can also help reduce human biases that are often present in decision making. our brains are designed to react to surprises by making sense of them. in seeking to do so, we often rewrite our perceptions from prior to these events. 10 even black swans may feel retrospectively predictable. this is known as ‘ hindsight bias ’ or the ‘ knew it all along effect ’. 11 as forecasters, we need to be particularly aware of this bias. to learn from our errors, we need to recognise that they are errors. by recording our quantitative forecasts and accompanying reasoning, we prevent ourselves from rewriting our original

to a continuation of low inflation ( figure 4 ). the bank commenced a new cycle of reducing the ocr, to an eventual low of 1. 75 percent in november 2016. today, in may 2017, the most likely scenario is for the ocr to remain stable for some time, although uncertainty remains high. figure 4 : selected 90 - day forward rates source : rbnz estimates. 25 see december 2017 monetary policy statement, box c. ozer karagedikli and c j mcdermott, “ inflation expectations and low inflation in new zealand ”, rbnz discussion paper 2016 / 09. conclusion forecasting is a valuable part of the monetary policy process, helping the bank to plan for the future, make well - founded policy decisions, communicate its understanding and intentions, and accommodate new information as it appears. it requires the bank to be rigorous, unbiased, and open to new ideas in formulating and implementing monetary policy. because we operate in a world of radical uncertainty, we do not know what might happen in the future ; we are not fortune tellers. however, because we want our forecasts to be relevant and useful, we present them numerically, an approach that comes with risks. as tetlock and gardner put it, “ use the number and you risk being unfairly blamed. stick with phrases as fuzzy as a puff of smoke and you are safe ”. 27 we do not want to be safe in this context as we welcome scrutiny, both internally and externally, as it builds understanding and fosters accountability. finally, good forecasting happens when the numbers are supported by evidence and reasoning, and subject to public scrutiny. when things – inevitably – do not turn out as projected we seek to learn from those episodes and continually work to improve our forecasts and policy - making. 27 tetlock and garnder, op. sit.