By Rob Elder of the Bank’s Inflation Report and Bulletin Division, George Kapetanios of the Bank’s Conjunctural Assessment and Projections Division and Tim Taylor and Tony Yates of the Bank’s Monetary Assessment and Strategy Division.
The MPC places considerable weight on its economic forecasts when setting monetary policy. But there is inevitably uncertainty around the outlook for the economy, and to communicate this, the MPC publishes its projections as fan charts. This article discusses some of the issues that must be taken into account when assessing those fan charts, it reports a range of formal and informal tests of various aspects of the MPC’s fan charts, and it discusses developments in the economy that may have pushed outturns away from the MPC’s central projections. With only six years of fan chart projections that can be compared with outturns, the sample is too small to draw strong conclusions. But to date, at most forecast horizons, inflation and output growth outcomes have been dispersed broadly in line with the MPC’s fan chart bands. That suggests that the fan charts gave a reasonably good guide to the probabilities and risks facing the MPC.
Assessing the MPC’s fan charts