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Bloomberg’s First-Ever Ranking of G-7 Central Banks
World Economy

Bloomberg’s First-Ever Ranking of G-7 Central Banks

The Federal Reserve is the most optimistic. The Bank of Japan made the biggest mistake. The Bank of Canada is the most accurate, but it’s got the easiest job.
These are just a few of the findings of Bloomberg’s first-ever ranking of Group of Seven central banks according to their ability to forecast their own economies. It turns out that the financial crisis really did ruin everyone’s estimates, just like the Greek crisis might this year, and complicated economies are harder to deal with.
The best forecaster of all: the International Monetary Fund. It beat the Bank of Canada, the winner in the rankings, more often than not on growth and inflation.
But the IMF doesn’t have a national mandate to set interest rates or deploy other tools, which is a key reason central banks exist and the motive for their forecasts. The projections are cranked into guidance on future policy moves that banks are offering more than ever—guidance that gets used by companies and governments  for their own decisions.
The Bloomberg analysis shows central banks’ performance has improved as the crisis eased. Since 2012, as the European debt crisis started to fade, they’ve mostly had lower forecast errors for either growth, or inflation, or both. The BOE had one of the biggest improvements, with its forecast error for inflation falling to 0.68 percentage point from 1.23. The BOJ is still struggling with its growth projections, with the average error rising to 2.1 percentage points from 1.39 point. 
To compile these results, Bloomberg looked at gross domestic product estimates one year ahead, inflation two years ahead, and compared them to average annual results from 2005-2014. The overall score reflects a Taylor Rule approach that gives equal weight to growth and inflation. Bloomberg also compared banks’ performance over the 10-year period  to the last three years, and to an index created by the Massachusetts Institute of Technology Observatory of Economic Complexity.
This league table of G-7 central bank forecast accuracy from 2005-2014 compares one-year growth and two-year inflation projections against actual results. A lower number means a smaller error.
1. Bank of Canada 1.63
2. Bank of England 1.77
3. European Central Bank 2.41
4. Federal Reserve System 3.08
5. Bank of Japan 3.86
The results also show that the Fed’s estimates overshot GDP in nine of 10 years. The BOJ’s miss on growth in the 2008-2009 fiscal year was the biggest, at 5.2 percentage points versus 2.6 percentage points in Canada. The Bank of England had the biggest inflation miss, underestimating consumer price gains by 3.1 percentage points in 2011.
 The European Central Bank was the only one to significantly outperform the IMF on growth, beating it in eight of 10 years. The Bank of Canada beat the Washington-based lender just three out of 10 years on growth and two out of five years on inflation.
 The Bank of Canada was the only one to provide comment. When asked what accounted for its overall accuracy, and why its inflation forecasts overshot in nine of 10 years, spokeswoman Louise Egan gave the same answer:
“There is never certainty in forecasting. Our projections are based on detailed analysis, careful modeling and on-the-ground information such as that gathered by the Business Outlook Survey. We put all this together to come up with our best judgment.”
The relative complexity of the economies covered by these banks seemed to be a factor in forecasting performance. Japan is the most complicated of the 144 countries according to the MIT observatory’s scale, which assesses nations’ diversity and sophistication by looking at their trade data. Canada is the least complex of the economies covered, with a ranking of 35.

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