Firms' Policy Rate Expectations: Accurate But Imperfect
A new study from the Bank of England's Decision Maker Panel (DMP) sheds light on how firms form policy rate expectations. The survey, which received over 12,000 responses from almost 4,000 firms between November 2024 and April 2026, found that firms' perceptions of current Bank Rate are remarkably accurate.
According to the study, firms in the DMP sample correctly identified the current policy rate 81% of the time, compared to 46% of households who were asked the same question. Firms also adjusted their expectations quickly in response to policy decisions, with forecast errors increasing at longer horizons.
The study found that more productive firms and those with higher levels of borrowing made more accurate forecasts. Larger firms (250+ employees) had smaller absolute forecast errors across all horizons compared to smaller firms (10-249 employees). The relationship between firm labour productivity and three-month absolute Bank Rate forecast errors was also highly statistically significant.
The study's findings suggest that larger, more productive, and more financially exposed firms may be better placed to anticipate monetary policy changes, potentially supporting their role in the monetary transmission mechanism. Firms' policy rate expectations were also closely linked to their inflation outlook, with a strongly positive correlation between changes in one-year-ahead CPI inflation expectations and one-year ahead Bank Rate expectations.