TO understand why so many economists - 24 out of 27 - got it wrong in tipping the Reserve Bank would cut interest rates yesterday, you need to know a bit more about the forecasting business.
All Australia's big banks and investment houses employ a team of economists to advise their clients - that is, investors - on the likely path for the economy. The more helpful the advice, the more likely it is that investors will use the services of that bank.
These private-sector economists produce regular forecasts for clients about the probable direction of economic growth, inflation, the exchange rate and interest rates during the coming year.
Such client notes often find their way into the inboxes of journalists, providing a handy source of quotable quotes. The problem is, these economists are only human.
Once an economist has made a call, for example, that rates will fall next month, it is a natural tendency to parse each data release for things that support their call. For example, last month's jobs figures were decidedly ambiguous, revealing a bigger-than-expected fall in jobs but also a steady unemployment rate thanks to lower participation. Bearish economists dwelt on the job losses, bullish economists on the steady unemployment rate.
In truth, it's not an option for these guys to sit back and say: ''Look, I don't really know what's going to happen.'' They're paid to have insights. The best of the breed accept and embrace the inherent uncertainty in the forecasting biz. Wise employers and clients recognise this and accept forecasts for what they are: best guesses given available information.
And then comes the media, which, it must be said, doesn't deal well with uncertainty (a human trait).
Before every Reserve decision, the economists are surveyed by wire services such as Bloomberg and AAP about their rates call. This month's Bloomberg survey found that 24 of 27 economists surveyed expected a quarter of a percentage point cut yesterday. Hence the media commentary that a rate cut was almost a sure thing. As it turns out, it was no such thing.
The Reserve, for its part, feels under no compulsion to fall into line with this game calling. Its board members have the privilege of waiting until all the data is in before acting.
And in recent weeks, the economic data have, on balance, taken a positive turn - or, at least, stopped getting worse.
As the governor, Glenn Stevens, noted yesterday, the US is in ''moderate expansion'' and Chinese growth is ''quite robust''. Commodity prices remain at ''quite high levels'' and in Europe ''some progress has been made''.
In Australia, growth is close to trend, joblessness is steady, house prices appear to be stabilising, inflation is close to target and interest rates are at close to their medium-term average.
The banks may yet raise their lending rates, forcing further Reserve cuts. But for now the Reserve's attitude can be summed up as: sitting pretty.
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