Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia or RBA stated that given the lags in monetary policy transmission, we always have to forecast how we think the economy will evolve, and set policy now so that we expect to achieve our mandate once any policy change has had time to have its effect. In practice, policy decisions also take account of uncertainties about the outlook. We put significant effort into identifying and understanding the risks around the baseline forecast, and the Board explicitly considers such risks in its decision-making, she noted.
In recent years many central banks have described their policy setting as ‘data dependent’. Rather than meaning that policy responds mechanically to particular pieces of data, we are data dependent in the sense that incoming data affects our view of where the economy is today and the outlook, and this in turn influences the path for policy. At times of heightened uncertainty about how the economy is responding to shocks – for example, during the pandemic and the immediate aftermath –central banks may put a higher weight on real time data relative to baseline forecasts and models. But these weights change over time, as conditions evolve and we learn more about how the economy is responding; policymakers must always take a forward-looking view on the outlook, according to Hunter.