This Forecast in-depth page has been updated with information available at the time of the November 2022 Economic and fiscal outlook.

We forecast several variables by using the expected values that are implicit in the prices of 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, natural gas prices and interest rates. We also forecast equity prices by using the latest market values and projecting them to grow in line with our forecast for nominal GDP. The exchange rate is assumed to follow a ‘random walk’, meaning it is held flat over the forecast period. The rest of the economy forecast is then in effect conditioned on these implied financial market expectations of the likely future paths of these variables.

Financial market indicators can be volatile, responding to news and events from day-to-day. We therefore normally base our forecasts on the market-implied expectations over a 10-working 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 would normally set the 10-working day window for our final economy forecast to be as near as possible to the point where we close down the forecast to everything but the effects of new policies. But on occasion, we have adopted other approaches – for instance, following significant movements in energy prices, gilt yields and other key market determinants in 2022, we based our November 2022 Economy forecast on a 3-day window and our Fiscal forecast on a 10-day window.

  Gas and oil prices

Our November 2022 natural gas price forecast is, over its first three years, based on the average path implied by the UK natural gas futures curve. For our economy forecast we took the 3 working days to our collection date and for our fiscal forecast we took the 10 working days to our collection date. Similarly, our oil price forecast over the first three years of the forecast is based on the average path implied by the Brent crude futures curve for the 3 or 10 working days to our collection date. The reason we used futures curves for the first three years in our March and November 2022 forecasts, was because movements in gas price futures were unusually significant over that period (we had previously used futures curves for only two years). Beyond that point, we hold both prices flat in real terms using a price index based on major countries’ CPI inflation. This is because at extended horizons, we believe commodity futures markets are not sufficiently liquid to give a reliable representation of market expectations for prices. This methodology is informed by IMF analysis that suggests that commodity futures curves are not the best predictor of spot prices at extended horizons.[1]

[1] Reichsfeld and Roache, November 2011, IMF Working Paper: Do Commodity Futures Help Forecast Spot Prices?

  Back to top

  UK interest rates

The expected paths for a number of measures of UK interest rates – notably Bank Rate (set by the Bank of England) and gilt yields (the market-determined interest rate paid on government bonds) are derived from financial market instruments including sterling overnight indexed swap (OIS) rates. As described above, in our November 2022 forecast we took an average of the market-implied path for each of the 3 or 10 working days up to and including our collection date for each of these variables.

  Back to top

  World interest rates

We take an asset-weighted average of both short-term and long-term interest rates for the USA, Canada, Japan and Euro-area, using data collected from interest rate futures markets.

  Back to top

  Exchange rates

In our November 2022 forecast, our trade-weighted sterling effective exchange rate index (ERI) economy and fiscal forecasts respectively took 3 and 10 working day averages of the latest outturn , and then held these averages constant over the forecast horizon. We take the same approach with both the sterling/dollar and sterling/euro exchange rate.

  Back to top

  Equity prices

We usually assume that the FTSE All-Share index will be equal to the 10-working day average up to and including the collection date over the remainder of the current quarter (although, as set out above, we used 3 or 10 days in our November 2022 forecast). After holding equity prices equal to this value in the very short-term, we grow prices with our forecast for nominal GDP over the remainder of the forecast period.

  Back to top