Why is demand forecasting so important for central banks?

Demand forecasting.

In central bank parlance we are talking broadly about being able to reliably supply the right quantities of banknotes to the population at the right time. And in order to achieve this efficiently and cost effectively, the right quantities of new banknotes must be ordered at the right time. Since about 85% of all transactions involve cash, this is an onerous responsibility. The going lead time for a banknote reprint order can be anywhere between 6 and 12 months. So..

  • When would you need to activate the print order?
  • Do you know what the demand will be when those new notes arrive?
  • Will it be any different from current demand?
  • By how much?
  • What about 18, 24, 36 months ahead?
  • Is your annual cash cycle seasonal, cyclical or a combination of both?
  • What about accurately charting the behaviour of each denomination within your total forecast so that you can best meet the biggest monthly peaks and troughs of cash demand?

So many questions at the most basic level, but a clear indication of the importance of accurate forecasting - “predicting the future as accurately as possible, given all of the information available, including historical data and knowledge of any future events that might impact the forecasts.” (Rob J Hyndman).

DLR Analytics forecasting.jpgEven in instances where the annual trend is fairly predictable, seasonal spikes caused by events such as religious festivals place greater emphasis on the need for accurate forecasting. 

 

There is so much more to supplying cash than simply providing a physical form of money. Over or under supply of cash can have serious economic implications so it is vital to know what the value of currency in circulation is and what percentage of the total is made up by each denomination. With this knowledge and relevant historical data, central banks can use a variety of forecasting models to make informed and accurate predictions. Knowledge of the dynamics of the local cash cycle and any significant future events can enable even greater accuracy by allowing forecasters to adopt that model which best fits their scenario. 

 

Accurate forecasting of demand achieves important objectives for central banks, including.

  1. Optimizing ROI in terms of buying new notes.
  2. Fulfilling a key objective for economic stability through the reliable supply of cash.
  3. Retaining public confidence in the value of the local currency.

In a fast changing modern world where central banks are not immune to the demands for greater efficiencies, optimized returns on investment and good corporate governance, accurate demand forecasting for banknote procurement and supply should be a priority if it isn’t already.

 

What are your thoughts? I would be really interested to hear your perspective.

You can contact me at doug.brooks@delarue.com 

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