This Forecast in-depth page has been updated with information available at the time of the March 2021 Economic and fiscal outlook.

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:

  Oil prices

The average path implied by the Brent crude futures curve for the 10 days to our collection date is used for the first two years of our forecast, after which we hold the price flat in real terms using a price index based on major countries’ CPI inflation. This methodology is informed by IMF analysis that suggests that the futures curve is not the best predictor of oil prices beyond a two-year horizon. That may be partly due to the oil futures market beyond the two-year horizon not being sufficiently liquid, i.e. there are not enough transactions, to give a reliable representation of market expectations for oil prices beyond that point.

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  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, we usually take an average of the market-implied path for each of the 10 days up to and including our collection date for each of these variables.

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  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.

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  Exchange rates

Our trade-weighted sterling effective exchange rate index (ERI) forecast takes a 10-working-day average of the latest outturn up to 29 January 2021 and holds this average constant over the forecast horizon. We take the same approach with both the sterling/dollar and sterling/euro exchange rate.

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  Equity prices

Our equity prices forecast is constructed in a slightly different way and does not use futures markets. Instead, we assume that the FTSE All-Share index will be equal to the 10-day average up to and including the collection date over the remainder of the current quarter. Equity prices are then assumed to grow in line with our forecast for nominal GDP over the forecast period.

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Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.