Our economy forecasts include a number of variables where we use the expected values that are implicit in the prices of various financial market instruments. Since these reflect the collective views of the large number of investors in each market, it seems unlikely that our own forecasts could systematically outperform these values. We use this approach for oil prices, interest rates and the exchange rate. We forecast equity prices by using the latest market values and projecting them to grow in line with our forecast for nominal GDP growth. The rest of the economy forecast is then in effect conditioned on these implied financial market expectations of the likely future path of these variables.
Financial market indicators can be volatile, responding to news and events from day to day. We normally control for this by basing our forecasts on the market-implied expectations over a 10-day window – a period that aims to be short enough to capture the latest market view, but long enough to be less susceptible to day-to-day volatility. Usually, at the start of the forecast process, we agree a forecast timetable with the Treasury that includes the dates at which we will take financial market expectations. We set the 10-day window for our final economy forecast to be as close as possible to the point where we close down the forecast to everything but the effects of new policies.
In our March 2021 forecast, we used the 10-day average to 29 January for most of these variables, but for Bank Rate and gilt yields we used the rates prevailing on 5 February, which incorporated the news about the likelihood of negative Bank Rate contained in the Bank of England’s February Monetary Policy Report.
The main conditioning assumptions we use in our forecast are: