The Difficulty of Forecasting Interest Rate Changes

The process of forecasting interest rates is an involving one since to close the margin of error a forecaster must take into consideration a multitude of different factors. The whole point of forecasting interest rates hinges on the need to adapt seamlessly to the ever-changing financial conditions in the markets and in the economy in general. Investment managers and regulatory bodies seek out economists to make interest rates predictions so that they can be well informed as they try to adapt to the changing conditions of the markets and economies. The process involved in interest rates forecasting includes the use of techniques, economic schools of thought, and econometrics(Caporale & Pittis, 1997). The three directions of interest rates that can be achieved during the dynamic process of forecasting are whether the rates of interest will go up, go down, or stay the same. These three outcomes form the basis of predicting the future direction of interest rates and the more accurate the prediction the more productive the economic decisions that will be made from those predictions.

Predictions during stable economic times tend to be more accurate but the challenges are toughest when the predictions are required to provide information on major turning points in the financial and economic landscape. It is when economic times are most unstable that future predictions would be most useful but that is when they fail miserably at delivering reliable forecasts. Despite being very complex and often inaccurate, interest rates forecasts are valuable in that they help to paint a possible picture of the future economic conditions. Although no one can make 100% reliable prediction of how interest rates are likely to fluctuate or move, the techniques involved in the complex attempts at forecasting shed light on historical performances and past events, information that can be used to anticipate the future in one way or another.

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