Has the publication of regular forecasts, which are seen to bear a close relationship to the decision taking process, helped to make the policy decisions themselves more predictable? The test is whether markets are less likely to be surprised by interest rate changes, given full knowledge of all the relevant economic news. We ran some simple statistical tests on two measures of ‘market surprises’. One is based on the Reuters poll of economists. The surprise measure is the difference between the actual repo rate change and the mean expected repo rate change. The other surprise measure is a bit further out along the yield curve: changes in the implied three-month forward LIBOR rate.11 Both measures suggest that interest rate surprises have become significantly smaller in the post-2001 period than previously (Table 2 Panel C), consistent with improved policy predictability. But, intriguingly, there is also some tentative evidence that surprises in Inflation Report months tend to be relatively large.12 What are we to make of that? 11  More precisely, this is an implied 3-month Libor forward rate at a constant horizon of 3-months, where the constant horizon is calculated by linear interpolation of adjacent futures contracts. The results are largely invariant to using six or twelve month horizons. 12  This could, of course, be entirely driven by the expectation that there would be no move in non-Inflation Report months: in the extreme, if the distribution of surprises in those months is degenerate (i.e.
And that counts, both when it comes to organising the debate between nine experts, and when it comes to explaining the basis of policy to a non expert public. But forecasts are highly fallible, so our forecast centred approach to inflation targeting has gone hand in hand with a determined effort to illustrate the wide range of uncertainties around any central projection and a systematic attempt to factor the Committee’s own judgements about the risks into decision taking. That, for me, is a key reason for resisting recent calls by the IMF and others for the Bank to ‘publish numerical projections for a broader range of key variables’. Detail is seductive – but it can also be highly misleading, and a committee that spent its time debating the details of the forecast rather than using it as a tool to address big picture issues would be at risk of losing its way. Forecasts are indispensable – but they should be handled with care. 10  BIS Review 17/2005  Table 2. Interest rate surprises  A. Are rates changes evenly spread over the months of the year? Rate changes IR months non-IR months Whole period 1997-2000 2001-present  15 6 9  14 10 4  B. Are rates changes expected to be spread evenly over the months of the year?