Forecasting is an essential input to the work of the MPC, and, increasingly since the advent of the ‘One Bank’ strategy, into the work of the Financial Policy Committee and the Prudential Regulation Committee. The publication of forecasts, which occurs quarterly in each Inflation Report, is also an important output of the MPC, and forms a key part of the Committee’s communication strategy.
In this paper, the IEO details the work programme initiated towards the end of 2014 to provide Court with a better basis for evaluating the Bank’s forecast performance.
In general, the IEO’s empirical results suggest that there are a number of areas where the Bank’s core forecasts have performed well from a statistical standpoint.
The IEO’s work did, however, suggest two aspects of performance that merit further investigation. First, the IEO observed a tendency for some two year ahead projections to be less accurate than one year ahead projections, particularly so in the 2010–14 period. The second area of note relates to the Bank’s unemployment rate forecasting record: of the eleven variables evaluated, the unemployment rate forecasts performed the least well against our statistical tests, including tests of unbiasedness and efficiency. More broadly, the IEO’s empirical work, together with the numerous interactions the IEO had with producers and (internal) users of the Bank’s macroeconomic forecasts as part of this study, suggest that the following recommendations could assist the Bank in improving its forecasting capability: learn more from other forecasters and models; learn more systematically from the past; challenge conventions more; and provide more support for non-MPC internal users of the Bank’s forecasts.