# When all you have is a hammer

_The OBR builds its forecasts, and with them the government’s fiscal choices, on futures and other market prices. Those markets exist to manage today’s risk, not to predict where interest rates or energy prices will be in five years, and their record shows it._

Neil Woodford · 21 October 2026 · 7 min read

![A row of hammers](https://cdn.sanity.io/images/v3acfbvo/production/3c2165677be83a5fb5dd2edccee451217467c1db-2422x1616.jpg?w=1600&fit=max&auto=format)

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During last week’s Noise Cancelling podcast, I promised a follow-up note on the subject we were discussing in that episode. The objective of this note is to explain why both the OBR’s and the MPC’s extensive use of futures and financial market expectations in their forecasts, commentary and policy decisions is seriously and fundamentally flawed. The subject matter sounds a bit dry and maybe a bit esoteric but, for very obvious reasons, it is very important.

_[Watch: We covered this topic on The Show last week — Does Britain Really Need £35bn of Tax Rises?](https://www.noisecancelling.co/the-show)_

This brief note will touch on how the OBR and members of the MPC use futures markets and how they have become embedded in UK monetary and fiscal policy decision-making. It will also make a few suggestions as to what these important pillars of the monetary and fiscal policy establishment could do instead of relying on futures markets which, in my view, are so ill-suited to the role they are used for.

## The OBR builds its forecasts on market prices

The OBR makes extensive use of futures and other financial market prices to predict what will happen to a wide range of important economic variables, including energy prices (gas, oil and electricity), interest rates, gilt yields, mortgage rates, exchange rates and equity prices. The OBR calls these conditioning assumptions, and they form a foundational and vital part of the OBR’s forecasts, which in turn play a crucial role in framing government fiscal policy. The MPC also heavily relies on futures pricing to make policy decisions, and individual members of the committee frequently reference futures pricing in these markets in speeches and papers. It’s also important to bear in mind that the OBR in particular, as part of its oversight role, is making very long-term predictions for these variables across a five-year forecasting horizon and up to 50 years for its longer-term fiscal projections, and it is this application which speaks to the root-cause problem with futures prices. _(Neil in the margin: The OBR doesn’t forecast these itself. Bank Rate and gilt yields come from overnight index swap rates, oil and gas from futures curves for three years, the exchange rate is simply held flat and equity prices grow with nominal GDP. Each is averaged over ten working days before the forecast closes.)_

_[Embedded media](https://obr.uk/forecasts-in-depth/the-economy-forecast/conditioning-assumptions/)_

## Futures prices reflect today’s conditions

In summary, futures prices are not unbiased bets on the future but tools for immediate risk or volatility management and, because a forward curve is heavily dictated by present-day physical conditions in the market, not surprisingly they tend to reflect those conditions rather than future assumptions. Consequently, [academic studies reveal](https://www.ijcb.org/sites/default/files/journal/v7n2/ijcb-v7n2-interest-rate-forecasts-pathology.pdf) that futures curves have proven to be notoriously bad predictors of actual spot prices or yields over medium- to long-term horizons.

Here’s a good example of what I mean. During an energy price crisis caused by geopolitical instability, gas price futures can spike dramatically, not because supply is about to evaporate or disappear in two years’ time but because buyers are stressed and fearful now and so willing to pay a significant premium today to secure future supply. Futures markets can also be highly sensitive to media headlines and sentiment swings and are often subject to speculative trading behaviour. Proprietary trading and high-frequency trading firms also use automated strategies (algos) to try to capture minute price discrepancies over incredibly short time periods (milliseconds) in futures markets and, by doing so, provide short-term liquidity but, clearly, their buying and selling behaviour is far removed from the longer-term judgements organisations like the OBR and the MPC ascribe to the results of that behaviour.

Another critical problem with futures prices is that their reliability breaks down the further into the future they go. This is because the vast majority of the trading volume in these markets is concentrated in the immediate future or in near-term contracts. Further out, beyond a few months, trading volumes fall significantly, which means that longer-term prices can be distorted by a very small number of trades, which strips them of any objective predictive power. High leverage in some futures markets can also cause problems and distortions in periods of stress, when high volatility can force margin calls and panicked selling or buying, which will untether these markets from fundamental economic reality. This is very telling given that the OBR uses these futures markets to predict where, for example, ten-year gilt yields will be in five years’ time to calculate what the UK’s future debt funding costs will be. _(Neil in the margin: The OBR half-concedes this for energy. It uses oil and gas futures for only three years because, it says, those markets aren’t liquid enough to be reliable beyond that, and then simply grows prices in line with inflation. It applies no such caution to interest rates.)_

I suppose the ultimate flaw in these markets is that they are, by definition, driven by information that is available today and do not and cannot price what is difficult to predict but which could have a profound impact on the economy. I am not talking about unexpected military conflicts here but issues like changing saving behaviour, rising or falling productivity, trade agreements, the impact of AI or anything else like this. And it’s because futures markets are so heavily influenced by the impact of today’s news that [empirical academic studies show](https://cepr.org/publications/DP6548) that a simple “no-change” forecast, or one that assumes tomorrow’s price will equal today’s, routinely outperforms futures markets over even short- to medium-term horizons. _(Neil in the margin: The best-known study is Alquist and Kilian (2010) on oil: futures-based forecasts were biased and typically worse than simple alternatives, including no change. For UK interest rates, Goodhart and Lim found yield-curve forecasts useful for a quarter or two and of little use thereafter.)_

To give you a sense of the utterly hopeless track record of these markets, here is a chart that shows how appalling the OBR’s forecasts for base rates have been since it was established, which were of course based on interest rate futures markets.

![Five years out, market pricing missed Bank Rate by 2.4 points on average](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-hammer-oct26-bank-rate-five-years-e5a50e27953c-light.png)

_Each February the market priced where Bank Rate would be five years on. From 2010 to 2017 it was too high every time; from 2018 it was far too low. A forecast of no change at all would have been closer in nine of the twelve years._

Quite frankly, if I had a track record like that, I would have packed it in by now.

## The OBR’s productivity forecasts were too high every time

Whilst we are on the subject of the OBR’s dreadful forecasting record, here is a similar chart of its productivity growth forecasts, which were not based on futures markets but, nonetheless, have been equally appalling. Interestingly, after being too optimistic on productivity growth for years, the OBR eventually capitulated in November last year and [downgraded its underlying productivity growth forecast](https://obr.uk/efo/economic-and-fiscal-outlook-november-2025/), just at the moment when it appears that it has both inflected (upwards) and been understated due to ONS labour market measurement errors. _(Neil in the margin: In September the ONS said survey-based hours worked had been overstated. On its new method, output per hour grew 1.3% a year from 2009 to 2019, against the 0.7% it had previously estimated for the years after 2008, roughly halving the slowdown. The new method feeds into the headline figures from November.)_

![Line chart of output per hour, indexed to 2010 = 100. Thirty successive OBR forecasts from November 2010 to November 2025 fan upwards from the actual path; every forecast that can be checked against outturn finished above it. The November 2025 forecast sits below March 2025's.](https://cdn.sanity.io/images/v3acfbvo/production/3830ec73430176fc1f34cefa1e3c58f3910ad097-1832x1318.png?w=1600&fit=max&auto=format)

_Outturn is the ONS measure the OBR had in November 2025, before the ONS changed how it measures hours worked._

_[Embedded media](https://blog.ons.gov.uk/2026/09/17/measuring-labour-productivity-our-new-approach/)_

I mention this in passing because the OBR has an important issue to resolve here ahead of the Budget. If it sticks with its recently downgraded forecast, it could look, at the very least, obstinate or arrogant in ignoring recent data that shows both ONS labour market measurement errors and growing evidence of an uptick in productivity growth. But if it reverts to its pre-November 2025 expectation, it has to admit that it made an error this time last year, which is something this organisation finds incredibly difficult to do – in fact, I’m struggling to remember it ever doing so. _(Neil in the margin: John Healey delivers his first Budget as Chancellor next Wednesday, 28 October, and the OBR publishes a new Economic and fiscal outlook the same day.)_

_Neil on the productivity the surveys couldn’t see:_ [The great UK productivity myth](https://www.noisecancelling.co/read/the-great-uk-productivity-myth) — The ONS now admits its own labour survey understated Britain's productivity by half. The full story: how the establishment got it wrong, what it means for interest rates and tax – and the dated record of every time we said so.

## Market prices could push the Budget into needless tax rises

So, back to the subject of this note, which is the OBR’s flawed forecasting methodology, which in large part relies upon futures market pricing. To summarise, futures prices do not represent the absolute “best guess”, nor are they a mathematical expectation of where a price or yield will be in the future. What they are is a reflection of what investors are willing to pay today to lock in a price or yield and to hedge against risk. Consequently, they have a very poor record of accurately predicting future prices, especially over longer time periods, and they are worse than useless in anticipating the impact of structural changes in the economy which, as we should all know by now, are going on all the time. As bad as this is, the bigger problem is that when they are used, as they are in the UK, to determine contemporaneous fiscal policy decisions, they can lead to dangerous and completely unnecessary self-inflicted economic harm.

A great example is the situation we’re in right now. Futures prices are anticipating higher official interest rates and higher gilt yields (despite the consensus expecting inflation to be at target in 2028 at the latest). This increases future government debt interest payment forecasts and might trigger a fiscal policy reaction leading to higher taxes, which can be both inflationary, as they were in Rachel Reeves’s first Budget, and at the same time lead to lower growth. In other words, a series of totally inappropriate, unnecessary and damaging policy actions can be triggered simply because of the OBR’s reliance on completely unreliable futures prices. _(Neil in the margin: At the time, the Bank of England estimated that the October 2024 Budget would add just under half a percentage point to CPI inflation at its peak.)_

_Neil on the IFS Green Budget and the gilt yields it took from the market:_ [Seasonal stupidity, but don’t panic](https://www.noisecancelling.co/read/seasonal-stupidity-but-dont-panic) — The IFS Green Budget puts the Chancellor’s spending pressures at £35bn by 2030/31. Its growth forecast is too gloomy, and the gilt yields it takes from the market contradict its own forecasts for inflation and interest rates.

## The OBR should use its own judgement

Quite obviously, instead of this madness, the OBR should be using its “expert judgement” to determine where these important variables will be over the forecasting horizon, and it should back up that judgement with rational and well-reasoned arguments. Unfortunately, this common-sense solution to the problem is not about to be embraced. That’s because using market-based forecasts protects the OBR from accusations of political bias and also provides it with the shield of apparent transparency, albeit that, in my opinion, there is nothing transparent about the process currently in place.

Unfortunately, this means that until someone comes along with sufficient political bravery to point out that the OBR’s process is flawed and should be fundamentally reformed, we are stuck with the current insanity where the OBR uses a tool for a critically important purpose it was never designed for. A great contemporary, large-scale example of the law of the instrument, or Maslow’s hammer, which describes an over-reliance on a familiar tool or mindset to solve every problem. _(Neil in the margin: The philosopher Abraham Kaplan named it in 1964. The psychologist Abraham Maslow supplied the hammer two years later: if the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.)_