Limited help from interest rate projections

Gisle James Natvik

Interest rate projections from Central Banks have not resulted in better guiding of market participants on future monetary policy actions, according to research from BI Norwegian Business School.

The practice of publicly communicating future policy intentions through interest rate projections (IRPs), is today widespread among central banks and has been pursued for more than a decade by central banks in Norway, Sweden and New Zealand.

A main rationale behind IRPs is to improve market participants`ability to map new information into likely monetary policy consequences. Brokers, investment banks and analysts use these IRPs to model their expected central banks’ actions in advice they give to customers, as investment strategies and economic forecasts in general.

Market forecasts

By looking at market forecasts and IRPs for Norway and Sweden from the introduction in 2005 and 2007 respectively, researchers at BI found that these communication efforts do not generally improve how market forecasts respond to new information such as announced interest rate decisions or inflation updates. Whenever monetary policy announcements actually have reduced market forecast errors in either Norway or Sweden, its due to the implemented policy action and not as a consequence of announced future policy intentions.

It does seem that market reactions to announced policy decisions were generally improved in Sweden after the Riksbank introduced its own IRPs, but these improvements arose only for the target factor of market interest rates, which captures the monetary policy action rather than communication of future policy intentions. In Norway, this occurred already before the introduction of IRPs in 2005.

The researchers use high-frequency data on forward rate agreements for Norway, Sweden and New Zealand to measure market expectations.


Central banks’ communication strategies take different forms, from loosely indicating future policy options through speeches, to the more explicit form of describing the central bank’s planned conditional course of action through published interest rate projections (IRPs).

In both Norway and Sweden, the policy rate forecasts are conditional on macroeconomic projections based on economic models together with judgment by the Monetary Policy Committee. These projections are published in Monetary Policy Reports following an interest rate decision, and described as quarterly averages of the key policy rate.

Published 17. September 2020

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