RBNZ's McDermott says central bank forecasts are 'conditional', open to change

New Zealand's central bank stressed that its forecasts are conditional, and open to change as new information arises.

"It is important that financial market participants and the public understand the 90-day interest rate is a conditional projection," Reserve Bank assistant governor and head of economics John McDermott said in a speech to the Goldman Sachs Annual Global Macro Conference in Sydney. "It is not a commitment from the bank to a specific set of actions. The uncertainties faced in forecasting mean that the economy will almost always evolve different to what the bank expects."

The central bank last year reduced the benchmark interest rate four times, completely unwinding the previous year's rate hikes. McDermott said today that the change in outlook since the start of 2014 reflected significant falls in the price of oil and New Zealand's commodity exports, a stronger-than-expected exchange rate, weaker-than-expected capacity pressures and weaker non-tradables inflation.

Last month, the Reserve Bank opened the door for further cuts to the official cash rate, now at 2.5 percent, having indicated it had finished cutting the OCR in the December monetary policy statement.

McDermott said today the strength in the international economy, movements in oil and other commodity prices and the exchange rate could develop in unexpected ways.

"At the current juncture, the economy is faced with a number of unique supply-side developments which add additional uncertainty to the outlook. These include reconstruction activity in Canterbury, the recent sharp fall in oil prices, a rapid rise in inward migration and the potential impacts of El Nino."

Structural changes linked to globalisation, technology and demography can also have major impacts on economic growth and inflation, he said.

"If financial market participants understand the conditional nature of our forecasts, the 90-day interest rate projection can help participants understand how we are likely to respond to changes in the economic outlook," he said, noting they "generally have a very good understanding" of how conditional the forecasts are.

"Generally, market participants change their outlook for interest rates in a similar way to the bank as new economic and financial information becomes available," he said.

(BusinessDesk)