1 Owing to these lags, it is widely recognised that monetary policy should be forward-looking and have a medium-term perspective. As a consequence, monetary policy decisions are, to some extent, dependent on forecasts. Future developments in inflation and output are of key interest in central banks’ forecast exercises.
The relevance of price developments stems from the fact that the primary objective of many central banks is to establish and maintain price stability. Their interest in forecasting output, or, more generally, some measure of broad macroeconomic activity, results from their influences on future prices.