Lea Havemeister, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites and Ivan Yotzov
Monetary policymakers carefully craft their policy decisions and communication, and financial markets respond quickly. Yet the effect of policy on the economy ultimately depends on how firms perceive and anticipate monetary policy. We present new data from an economy-wide UK business survey on Bank Rate perceptions and expectations. The data provide direct evidence on monetary policy transmission, specifically on how firms form and update policy rate expectations. Firms’ perceptions of current policy rates are precise, and expectations adjust rapidly to policy decisions within days. Moreover, more productive firms and those with higher levels of borrowing forecast policy rates more accurately. CEOs and CFOs also link policy rate expectations to inflation expectations in ways consistent with standard macroeconomic models.
New data on Bank Rate perceptions and expectations
We use the Decision Maker Panel (DMP), a monthly online survey representative of UK businesses with ten or more employees. Launched in 2016, it is run by the Bank of England in collaboration with King’s College London and the University of Nottingham. Since November 2024, the DMP has asked firms about their perceptions of current Bank Rate (the interest rate set by the Bank of England’s Monetary Policy Committee) and their expectations at three-month, one-year, and three-year horizons. By April 2026, these questions received over 12,000 responses from almost 4,000 firms. We study how firms form policy rate expectations, which characteristics predict accuracy, and how quickly expectations respond to policy decisions and macroeconomic news. To the best of our knowledge, this post provides the first direct survey evidence of policy rate perceptions and expectations over time and across businesses.
Current Bank Rate perceptions are very accurate, but forecast errors increase over longer horizons
Firms’ perceptions of the current Bank Rate are remarkably accurate. Between November 2024 and April 2026, the mean actual Bank Rate was 4.21% compared to a mean perceived rate of 4.22% as shown in Chart 1 (left panel). Firms are better informed about current monetary policy than households: 81% of DMP firms correctly identified the current policy rate, compared to 46% of households who were asked the same question in the UK Survey of Working Arrangements and Attitudes (SWAA-UK) in December 2025. Firms in the DMP sample may be particularly attentive because the survey is run by the Bank of England. However, past research has shown that firms are highly attentive to current CPI inflation trends as well.
Chart 1 (right panel) shows how Bank Rate expectations have evolved in recent months. Between February and April 2026, expected rates rose at short and medium horizons, reflecting a slower anticipated pace of rate cuts following geopolitical developments in the Middle East. Firm expectations moved in the same direction but remained consistently lower in level compared with the overnight index swap (OIS) forward curve, which is the main financial market instrument used to measure market expectations for Bank Rate. The gap between firms’ expectations and OIS rates widens at longer horizons, likely capturing a growing term premium in financial markets in addition to the expectations for Bank Rate levels. Consistent with this, firms’ three-year ahead Bank Rate expectations are much closer to comparable Bank Rate expectations in the Bank’s Market Participants Survey results.
Chart 1: Firms accurately track Bank Rate and their expectations respond to economic developments
Over the full sample, firms are generally accurate in their Bank Rate expectations, but their forecast errors increase at longer horizons. Chart 2 (left panel) shows the distribution of forecast errors, measured as the gap between the realised and expected policy rates at different horizons. Positive values indicate actual Bank Rate was higher than earlier expectations for that period. At the three-month horizon, the mean forecast error is -1 basis point and around 60% of forecasts prove to be correct, while most other errors are 25 basis points. At the one-year horizon, the mean error widens to -17 basis points, and the distribution broadens considerably, with a standard deviation of 60 basis points versus 31 basis points at three months.
Disagreement across firms, measured as the cross-sectional standard deviation, increases with the forecast horizon: disagreement about three-year ahead rates is roughly double that for current perceptions (Chart 2, right panel). Furthermore, this disagreement is systematically higher among smaller firms (10–249 employees) than larger firms (250+ employees) at every horizon. Smaller firms appear to have less precise information or to devote fewer resources to monitoring monetary policy. These findings are consistent with models of so-called ‘rational inattention’. where collecting and processing information is costly.
Chart 2: Forecast errors and disagreement increase at longer horizons, especially for smaller firms
More productive firms and firms with higher borrowing make more accurate forecasts
We find that forecast accuracy is related to several firm characteristics. Larger, older, and more productive firms have systematically smaller absolute forecast errors across all horizons. The left panel of Chart 3 shows the relationship between firm labour productivity and three-month absolute Bank Rate forecast errors, controlling for firm characteristics and sector and time fixed effects. Each point represents around 5% of the full sample. The relationship is highly statistically significant, but also economically meaningful. Moving from the 25th to the 75th percentile of the productivity distribution corresponds to a 12% improvement in accuracy compared to the mean absolute error of 19 basis points.
Firms with more interest-bearing borrowing are also found to make significantly smaller forecast errors. Moving from the 25th to the 75th percentile of the borrowing distribution is associated with forecast errors that are roughly 16% smaller relative to the mean (Chart 3, right panel). One possible explanation is that financial exposure sharpens attention to monetary policy. Still, we note that the relationships presented in Chart 3 are correlations; the causal relationship may run in either direction, as firms that make better forecasts could be better positioned to make more informed decisions and therefore become more productive.
Chart 3: More productive and more indebted firms forecast policy rates more accurately
These findings suggest that larger, more productive, and more financially exposed firms may be better placed to anticipate monetary policy changes, potentially supporting their role in the monetary transmission mechanism.
Bank Rate expectations are tightly linked to inflation expectations and respond to policy rate changes
Next, we investigate how firms’ policy rate expectations are related to inflation expectations, macroeconomic data releases, and monetary policy announcements.
Firms’ policy rate expectations are closely linked to their inflation outlook. The correlation between changes in one-year-ahead CPI inflation expectations and one-year ahead Bank Rate expectations is strongly positive and robust to employing firm controls and sector and time-fixed effects (Chart 4, left panel). This is consistent with standard macroeconomic models, although the evidence is correlational and does not necessarily imply a causal link.
Chart 4: Bank Rate expectations are strongly correlated with inflation expectations
We further test the link between inflation and monetary policy expectations using event studies in the days around CPI data releases. We measure CPI surprises as the difference between the published CPI inflation rate and Bloomberg median forecasts. These surprises range from -0.3 to 0.2 percentage points over the sample period. Chart 4 (right panel) shows that CPI releases above market expectations lead firms to revise up their Bank Rate expectations at three-month and one-year horizons, consistent with expected monetary policy tightening in response to inflation surprises.
We also conduct event studies around releases of other macroeconomic indicators. We find that unemployment rates above market expectations lead to downward revisions in rate expectations, as firms expect the MPC will respond to labour market weakness with more accommodative policy. These patterns suggest that firms incorporate macroeconomic news into their rate expectations in ways that align with traditional channels of monetary policy transmission.
Finally, Chart 5 presents event studies of firm expectations around MPC meeting dates. Prior to the announcements, there is no systematic relationship between the eventual rate change and firm expectations, suggesting no anticipation. Policy rate perceptions adjust quickly following MPC meetings (top left panel): in the first five days after an announcement, a 100 basis point rate change translates to a 74 basis point update in perceived rates, on average, relative to the four days before the MPC meeting.
At longer horizons, three-month expectations adjust by about 68 basis points per 100 basis point move, and one-year expectations by 91 basis points. Three-year expectations show a weaker, statistically insignificant response, consistent with the interpretation that current policy decisions provide limited information about the more distant future and that long-term rate expectations may be more ‘anchored’ at a neutral rate. These results confirm that MPC communication is effective: firms absorb new policy information quickly and incorporate it into their forward-looking views.
Higher expected Bank Rate is also associated with higher expected borrowing rates, indicating firms understand policy pass‑through to their own financing costs.
Chart 5: Firms update Bank Rate perceptions and expectations within days of MPC decisions
Conclusion
New evidence from the DMP reveals that UK firms form interest rate expectations that are accurate, internally coherent, and responsive to new information. Firms track the current policy rate closely, update expectations within days of MPC decisions, and link their rate outlook to expected inflation.
However, important differences across firms exist. These patterns suggest that the transmission of monetary policy may be uneven. Larger, more productive, and more financially exposed firms forecast more accurately and may therefore be better positioned to incorporate policy signals, while smaller firms exhibit greater disagreement and larger errors.
For policymakers, our findings are largely encouraging. MPC decisions are quickly understood by firms. Expectations respond to macroeconomic data releases in ways consistent with the traditional transmission mechanism. Future work could examine how firms’ rate expectations translate into investment, employment, and pricing decisions, shedding further light on how monetary policy affects real activity and inflation.
Lea Havemeister is a PhD candidate at the University of Cambridge and a PhD intern in the Bank’s Structural Economics Division, Nicholas Bloom works at Stanford University, Philip Bunn works in the Bank’s Structural Economics Division, Paul Mizen works at King’s College London, Gregory Thwaites works at the University of Nottingham and Ivan Yotzov works in the Bank’s Structural Economics Division.
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