Does the euro area forward rate provide accurate forecasts of the short rate?

The forward rate can deliver accurate forecasts of euro area short‐term interest rates, depending on the time period. During periods of macroeconomic uncertainty, forecasts obtained from a model of yield and macro factors are more accurate than forward‐based forecasts. We provide evidence that a time‐varying forward premium explains the variation in the forecasting performance. We develop a method for computing forward premium confidence intervals to identify ex‐ante periods during which forward‐based forecasts are inaccurate.