Sunday, August 17, 2008

Reserve Bank trivia

Why do its forecasts always have the inflation rate returning to its target band?

Coalition politicians at this week's economics committee hearing felt a little pained that RBA had been forecasting inflation within the target band in the lead up to the election (essentially assuring everyone things were fine) and is now saying that that was the very time inflation was taking off.

Here's the revealing answer, from the Bank's Deputy Governor Ric Battellino, at Thursday's hearing:

"Our forecasts - we always have inflation coming back to the band, because by definition it has to.

I mean if you're not forecasting that it's back in the band you are saying by definition we've got the wrong monetary policy.

So you'll see that our forecast and every central bank's forecast for inflation around the world is basically at the end of the forecast period inflation is back in the band. That has to happen."

That's why.