The Hairy Business of Predicting Interest Rates

Many financial advisors and commentators when asked by clients about future interest rates reach for the latest chart and assert with confidence how rates will move. The current forward curve chart tells us that interest rates will be negative until 2025.

The same advisors when asked in February would have then proclaimed interest rates would be negative until 2026.

The only certainty about the future is that nothing is certain. The chart below helps illustrate this point by plotting the past forward curves over the actual path the 3- month Euribor followed.

Forward curve charts can be useful for pricing in more foreseeable market events in the near term and can be a somewhat accurate predictor over the next six months or so. Beyond that, they have not generally been accurate as the market cannot predict further and less certain events.