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Charlie Nelson
26 August 2002
Judging by articles in the Australian Financial Review, forecasting Australia’s official interest rate seems to occupy a lot of analysts for a lot of time. Almost every release of data or speech by the senior people at the Reserve Bank of Australia (RBA) is analysed to find fragments of information about the future of interest rates.
I have decided to put the forecasts of my models, as well as consumer expectations about interest rates, into the melting pot. This information is likely to be rather different from that put out by the “herd” quoted in the financial pages of the press, because we don’t use the same models that they do.
However, so prominent and so frequent is the quoting of forecasts by market economists in the financial pages of the press (and even in the national news pages) that it seems likely to influence consumer expectations. If that is the case then the forecasts, which are not always accurate, have the potential to influence consumer behaviour – perhaps in a way that the RBA would not desire. So we will be testing that hypothesis.
Of course, it may be that consumers read different signs than do economists and their expectations may provide a more valuable guide to the future than economists forecasts. We will put that to the test too,
This material will be updated every three months or so.
We have developed two models. One is a univariate model, in which future values of interest rates are predicted only using current and past values. This model attempts to find a pattern that movements in interest rates tends to follow. The other model uses a combination of other variables to predict interest rates and so can also provide sensitivity analysis (“what if” US interest rates rise, for example). Details are, of course, trade secrets.
Of course, the Board of the RBA are likely to give different weights to different factors at different times, so these models can at best be just a guide. However, statistically significant relationships have been identified in our analysis and so they could be quite a good guide. Time will tell.
Both models are predicting a modest and steady increase in interest rates from the current 4.75%.
The Australian Financial Review conducts a quarterly survey
of forecasts by economists. The
most recent survey, published on 15 July 2002, had a range of six month ahead
predictions between 5.0% and 5.75% with a mean of 5.38%.
This mean is slightly higher than our models predict, but the economists
may well have revised their forecasts downward since.
In May 2002, the majority of consumers expected interest rates to rise, a large change from November 2001 when more expected a fall than expected a rise. The May 2002 survey was taken after the first of the two recent rate rises and was quite accurate in the sense that rates did rise again in June.
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