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Lending & Credit Risk

Global Insight Rate Forecast: How good was their crystal ball?

August 16, 2014
Read Time: 0 min

Global Insight offers monthly forecast data on the US economy and interest rates under three scenarios: Base, High and Low. Global Insight rate forecasts are available to be loaded into your Foresight model monthly. 

As we close out 2014, I took the opportunity to review how close their rate forecast was for the year. The graph and information displayed below shows their rate forecast from twelve months ago compared to what the actual ending rates were in December 2014. Keep in mind that these are the shapes of the curve in their rate forecast ending December 2014; it took twelve months for these rates to ramp upward and end with the shapes displayed. They had given their Base rate forecast a 60% probability factor, High 20%, and Low 20%. The black line is the weighted average rate forecast based upon those probabilities.

So, how close were they?

412041-money-crystal-ballWell, in the Base rate forecast they were right on with their prediction on where the 5 Yr would be! But overall, the shape of the curve ended much flatter than they had predicted. In the Base forecast, they had predicted that the 10 Yr would already be at 3.13% when it actually ended at 2.24%. (And as I write this it is currently trading under 2%!) They predicted the 30 Yr would end at 4.1% vs. actual of 2.8%. These are some material differences and reinforces how incredibly difficult (even for a firm such as Global Insight) it is to predict market rates.

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How may this have affected your modeling?

Example: You may have some loans pricing off of the 10 Yr point and is being used as the pricing driver in the model (Foresight). In your forecast from twelve months ago, the new originations would have come on at higher rates than what they actually (most likely) came on at. This may have shown you earning more interest income on these accounts in the forecast when compared to actual. When performing your back testing reports, keep in mind which rate environment you are using, as this might factor into some of the resulting differences.

All this being said, you should continue running your model through rate forecasts from a reputable third-party such as Global Insight. It allows you to review possible scenarios that may adversely affect you and give you the opportunity to plan/hedge. At the very least, regulators like you running your model in non-parallel rate environments and the Global Insight rate forecasts satisfy that requirement.

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