Page 6 of 10  Given the centrality of the forecast, it is important to say something about the role of the forecast in the monetary policy decision-making process. Monetary policy acts with a lag.
According to our models, the full impact of a change in interest rates could take between 12 and 18 months to fully work its way through the economy to impact on GDP1 and inflation. For this reason, monetary policy decisions need to be based on the expected path of inflation and not on current inflation, which is a function of past monetary policy.