In the euro area, for example, the full transmission of interest rate decisions to output has been estimated to be between one and two years, and even longer for inflation.1 So, if we were to decide policy on the basis of past outcomes, we would always be behind the curve. Monetary policymakers therefore have to look at the economy in a forward-looking way.
To do this, we produce forecasts, on a regular basis, that indicate our central expectations for the economy – the baseline. In principle, this should be enough to form a view on how policy should be designed today. But we all know that this would be a bad idea.