Accuracy of International Interest Rate Forecasts

This study exploits a unique data source with contemporaneous forecasts of three‐month Euromarket interest rates for five different countries. Professional forecasts are explored in a way that avoids two limitations of previous research. First, rather than being restricted to just U.S. interest rates, data are used for five different countries: the United States, Germany, the United Kingdom, Japan, and Switzerland. Second, the study relies upon data gathered on a single date, rather than over a period of weeks. Consensus forecasts are evaluated against two naive models: a no‐change model and a forward rate forecast. In general, the consensus forecasts prove superior to the no‐change forecast. The consensus measures, though, are found to be inferior to the forward rate forecast. This is true even considering the dramatic success of the banks in forecasting U.S. rates in this period. However, if the spectacular, and perhaps uniquely successful U.S. results are excluded from consideration, the banks proved dramatically inferior to the forward rate of interest in forecasting interest rates. Thus, the ability of these banks to forecast three‐month interest rates for these five countries exceeds that of a no‐change forecast, but falls below the forecasting ability of the forward rate.