t expect the central forecast at that date to be a failsafe indicator of future changes in interest rates. bis central bankers ’ speeches chart 2 inflation forecasts explain a small proportion of subsequent average vote and it isn ’ t. chart 2 plots the mpc ’ s central two - year inflation forecast against the average interest - rate vote on the committee over the following three months. there ’ s a moderate correlation – on average, a higher inflation forecast is followed by votes for tighter rather than looser policy, conversely when it ’ s below target. it ’ s hardly a tight relationship, however. the degree of fit – the proportion of the policy variation explained by the most recent inflation forecast – is only 8 %, even less if you exclude the figure for 2008q4 ( the dot in the bottom left - hand corner ). source : bank of england and bank calculations. what seems to have mattered much more is what actually happens to the economy. chart 3 plots the same average vote against a contemporaneous survey measure of economic growth. the fit is much better, particularly in data prior to 2008. chart 4 then plots any residual correlation between forecasts and subsequent votes, controlling for the economic data. there is none. admittedly, it ’ s become harder to uncover simple reduced form relationships, such as the one in chart 3, since the financial crisis. for much of that period interest rates have been pressed up against the effective lower bound : there hasn ’ t been any variation to work with. in addition, the pre - crisis relationship in chart 3 exists because the mpc was generally confident about the stability of the underlying rate of supply growth ; that hasn ’ t been the case in recent years 1. comparing chart 2 and 3 is in any case slightly unfair as it measures forecasts at one date against data on growth, which are released slightly later, over the following three months. but it does at least bear out an important point about our inflation forecasts, not to say all forecasts : while they do carry some information about the future, they are ultimately superseded by events. this is a point that i – and countless other central bankers – have made before, of course. however, it does seem to bear repeating. too often, it seems to me, what we communicate about the path of future policy, whether that ’ s direct or something backed out from forecasts, is treated as something close to an unconditional promise. but it can ’ t be.

that ’ s because it ’ s the job of policy to respond to things that are unpredictable, in order to offset their effects, as best we can. so even if it ’ s the mpc that sets interest rates, in some narrow sense, it ’ s ultimately the economy that determines them. and our forecasts are intended not as some reliable guide of a particular policy path, but to help people understand how we see the nature and distribution of economic risks over the future. broadbent ( 2014 ). bis central bankers ’ speeches chart 3 policy decisions better correlated with economic growth chart 4 controlling for growth, ir forecasts uninformative about policy source : ons, cbi, markit economics, bank calculations. source : ons, cbi, markit economics, bank calculations. the “ excess ” volatility of bond yields one way to think about the unpredictability of the future is to look at financial markets. prices of financial assets are in many ways the embodiment of forecasts : they depend critically on how people think the future will evolve. so every time the price of an asset changes, someone ’ s forecast has gone wrong, or at least has had to be revised 2. and as you know, asset prices change a lot! in fact, if anything, as the economist robert shiller observed many years ago 3, they appear to move too much. equity prices are more volatile than seems justified by the variability of corporate earnings, as least over the sample period he considered ; bond yields look to be more variable than reasonable forecasts of future short - term interest rates. economists have therefore presumed that asset markets are prone to “ time - varying risk premia ”. in the case of bond markets, these would take the form of variations in the so - called “ term premium ” – by definition the gap between yields and expected future short rates. and although the term premium has generally been positive – on average, longer - term bonds have yielded more than rolling over a sequence of short - term bills – it could also be negative at times. for example, if investors worry about growing ( if small ) risks of some very bad economic outcome, that would tend to depress the yield on safe assets to levels below the expected future short rate. people are prepared to pay over the odds to insure against such tail risks 4. unfortunately, it ’ s hard to distinguish these risk - induced movements in bond yields from those in the true expected