Options market offers central banks a way to build commodity price futures into thinking

The Bank of England in London, Britain. Picture: REUTERS/HANNAH MCKAY

As a result, forecasting inflation in 2022 has become more art than science. What would be the Saudi king’s response to US pressure to boost oil production? What’s Vladimir Putin going to do with Europe’s gas supply? How will Beijing react to record high coal prices? Perhaps that’s beyond the expertise of any central banker. Instead, most of them rely on rather unsophisticated tools to incorporate commodity markets into their models.

And yet, in the very same study, the authors argued that the bank should continue using the futures curve for its forecasts. One reason? It’s easier.

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