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Forecasting and Forecast Narratives: The Bank of England Inflation Reports

We analyze the narratives that accompany the numerical forecasts in the Bank of England's Inflation Reports. We focus on whether the narratives contain useful information about the future course of key macro variables over and above the point predictions, in terms of whether the narratives can be used to enhance the accuracy of the numerical forecasts. We also consider whether the narratives are able to predict future changes in the numerical forecasts. We find that sentiment related to speci?c aspects of the economic outlook (say, demand conditions, or supply conditions)
can enhance point forecast performance, and changes in sentiment (expressed in the narrratives) can predict subsequent changes in the point forecasts.
Keywords: Sentiment indices, inflation forecasting, output growth, forecast encompassing.

Published on 29th November 2016
Authors Professor Michael Clements
Series Reference ICM-2016-10