The Reserve Bank today released a Bulletin article reviewing forecast performance.  The article uses forecasts from a suite of statistical models as a benchmark to evaluate the performance of forecasts prepared for the Reserve Bank’s quarterly Monetary Policy Statements.

It concludes that since 2003, MPS forecasts have shown similar forecast accuracy to the statistical model forecasts, with slightly more accurate forecasts for near-term interest rates and GDP growth, and inflation at longer horizons.

Neither the MPS forecasts nor the statistical model forecasts performed well at forecasting the exchange rate. The Bank has under-predicted the level of the TWI, leading to lower-than-expected tradable and headline inflation. In recent years, non-tradable inflation has also been lower than forecast, while forecasts for GDP have been largely unbiased.

Reviewing forecasting performance is an important part of the Bank’s forecasting process as it helps to ensure the understanding of economic relationships and drivers is up-to-date. Monitoring forecast errors also enables the Bank to evaluate its monetary policy performance and consider whether it has responded reasonably to new information.

The article published today follows the recent publication of two other Bulletin articles which assessed the Bank’s forecast performance compared to external forecasters and provided a behind-the-scenes look at OCR decision making. These articles were recently referenced in a speech by Assistant Governor John McDermott explaining how the Bank formulates and assesses its monetary policy decisions.

Read the article: Evaluating the Reserve Bank’s forecasting performance