the value of forecasting in an uncertain world a speech delivered to the new zealand manufacturers and exporters association ( nzmea ) in christchurch on 15 may 2017 by dr john mcdermott, assistant governor and head of economics 2 the terrace, po box 2498, wellington 6140, new zealand telephone 64 4 472 2029 online at www. rbnz. govt. nz " we are all forecasters. " tetlock and gardner, superforecasting. 1 it has often been said that there is no escaping forecasting. every decision we make in life involves forming a view about what the future might hold. likewise, there is no escape for the bank. we have a policy targets agreement that requires us to keep future inflation between 1 and 3 percent and therefore we need to form a view of where we currently are, how future developments might influence the path of output and inflation, and thus how we should respond. 2 we use our forecasting to establish a clear and well - founded plan for what monetary policy settings are necessary to achieve our inflation target, to communicate this plan to the public and to support the effectiveness and transmission of monetary policy. we present our forecasts in the quarterly monetary policy statement. a great deal of effort goes into producing these forecasts. more often than not, the world does not turn out as we forecast. however, forecasting is still a valuable and necessary part of the monetary policy process. producing forecasts and allowing them to be publically subject to challenge enables us to build a solid foundation for policy decisions, learn from developments, and improve our policy outcomes. forecasting is not supposed to be prophecy ; rather, it is about being precise about our thinking. uncertainty and the challenges for forecasters a major challenge for forecasters is ‘ radical uncertainty ’, that is, we fundamentally don ’ t know what the future holds. examples of this uncertainty are ‘ black swan ’ events that fall outside any existing experience. the term is derived from the northern hemisphere belief that all swans were white, based on the empirical 1 philip tetlock and dab gardner ( 2015 ), superforecasting : the art and science of prediction, cornerstone digital. our specific mandate is established by the rbnz act ( 1989 ) and the policy targets agreement ( pta ) which state that the bank should use monetary policy to maintain price stability in the new zealand economy. we have considerable flexibility around how we do this, reflecting the tradeoffs necessary to protect

market and self - discipline are effective, they are not enough on their own because of market failures. 6 regulatory discipline – the imposition of requirements on regulated entities – is necessary to improve the effectiveness of market and self - discipline, and to minimise the costs of that could be visited on the financial stability commons. our role as regulator means setting robust requirements that are fit for purpose – that address risks and market failures at source, taking into account the costs of regulation and of supervision on our regulated entities and the wider economy. setting rigorous but not too stringent requirements is our challenge, informed by research, experience and feedback. 7 we need to understand new zealanders ’ appetite for risk, analyse the costs and benefits of regulatory requirements, and have processes for decisionmaking that provide confidence that in high quality decisions being made. … and we do not run a zero failure regime achieving financial stability does not mean eliminating all risks. this would create inefficiencies of its own – it would potentially stifle new entrants, and remove the incentives for growth, innovation and healthy risk - taking. so we do not run a zero failure regime. allowing institutions to fail provides the incentives for self - and market - discipline to operate effectively. however, in order to allow individual institutions to fail we need a robust financial system that can continue to function even when individual entities are experiencing distress or failure. in those situations the bank is tasked with minimising the impact of distress or failure of an institution on the financial system and the economy. our role is dynamic by necessity our role is a dynamic. the financial system is constantly evolving, as are the risks and challenges. this means that establishing baseline standards is not a set - and - forget exercise. our requirements and expectations of regulated entities continue to evolve. while it is impossible to predict the future, it is incumbent upon us, when we do impose requirements and set expectations, to think about their effect, and how they might be adapted, in different states of the world. we monitor the financial system … we continuously monitor the financial system in order to identify and assess : • • structural risks : ever - present risks related to the composition of the financial system, in terms of its institutions, and their assets and funding. new zealand is exposed to external shocks and standards must recognise these risks and shield the domestic system and economy. emerging risks : risks related to traditional areas of focus like credit or funding risks, or to new and emerging technologies or to