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Thursday 29 September 2022
Interest rate uncertainty I don’t know about other economists, but when I make a forecast I do so reluctantly and don’t expect to be right. Having been in this game for three and a half decades I know how much outright guesswork is involved and how out of date models are as soon as they are squished and massaged to fit past relationships. Some economists have to produce numbers because they have clients who are actively taking positions in quickly traded financial assets on the basis of what they say. So, a high degree of care is needed when making the forecast and justifying its difference with those of other forecasters and current market pricing is very important. I try to avoid giving numbers and you might think that the best thing to do would be to instead pick a range. Not so. People will choose whichever end of the range suits them most for their particular purposes – as I found with a prediction of the dairy payout a couple of decades ago. I almost had it right for the top end of my prediction, but all focus was immediately on the potential low end outcome. It didn’t go too well for me for a while there with the farmers and agribusiness lenders.
Hence, don’t expect to see forecasts put out in terms of ranges in which the outcome is likely to occur. You greatly magnify your chances of being slammed and will be seen as a bit wishy washy by those who desperately want a single number to work with. My preference is to give a general indication for where things are likely to go and then concentrate on two things. 1. Make people aware of the risks surrounding the future and encourage them to not overly rely on one set of predictions proving correct. Hedge your bets and allow for things turning out differently – because they will. 2. Get the most up to date information as possible in order to be able to spot divergences in the real world from earlier expectations, then convey the changing risks to people. Interest rate outlook changes So, let’s do this exercise with interest rates. This is the area where the swirling mass of
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