Exterior of the Bank of England in London, UK.
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LONDON – The Bank of England on Friday announced a “once in a generation” review of its inflation forecasts, following a long-awaited review by former Federal Reserve Chairman Ben Bernanke.
The review, launched in response to criticism of the central bank’s recent policy decisions, sets out 12 recommendations that central bank governor Andrew Bailey said the bank would work to implement.
Bailey told CNBC that comparing and contrasting the U.S. policy perspective with that of his own country was “invaluable.”
“This is a once-in-a-generation opportunity to update our forecasts and ensure they are fit for a more uncertain world,” Bailey said.
Bernanke’s recommendations consist of three main areas: improving the Bank’s forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC), and better communicating economic risks to the public.
These include scrapping the central bank’s long-held “fan chart” forecasting system and introducing a revamped forecasting framework.
Fan charts, which show various data points expected in the future, have long been used by central banks to illustrate the probability distributions that form the basis of inflation forecasts. However, the model has come under heavy criticism in recent years for failing to accurately track inflationary pressures, and a review concluded that FanChart had “past its usefulness” and “should be retired.”
Instead, the BOE recommended using a new model that better reflects the commissioners’ differing views and how inflation expectations are “de-anchored.” BOE added: It said it currently relies more on central forecasts than other central banks, but they may not fully take into account a wide range of risks and need to be supplemented with a wider range of alternative scenarios.
Additionally, the review says banks need to improve their communications with the public, suggesting less emphasis on core forecasts and simplifying policy statements to make them less repetitive. He also said that modernizing the software used to manage and manipulate data is a “top priority.”
Review of policy planning
The Bernanke Review was launched last summer to assess central banks’ struggles to accurately predict the huge spike in global inflation following Russia’s invasion of Ukraine.
The central bank was widely criticized for raising rates too slowly and was subsequently forced to raise its main bank interest rate to 5.25%, the highest level in 15 years.
Now, with inflation falling faster than the MPC expected, some economists argue that the MPC is making the same mistake in the opposite direction, cutting rates too slowly.
Bernanke added that his role as Fed chairman during the global financial crisis had highlighted the important role of monetary policy in the real economy, but the review said that the BOE’s recent decision-making was “no matter what.” I’m not making any judgments,” he added.
“The financial sector’s impact on the economy goes beyond interest rates. Credibility is important. Risk-taking is important,” he told CNBC.
He added that while the difficulty in predicting is not unique to the BOE, he hopes the agency will draw appropriate lessons from this experience.
The review recommended that the Bank take a phased approach to introducing new measures, starting with improvements to forecasting infrastructure. He then said that changes to policy decisions and communications need to be proceeded with “carefully”.
Claire Lombardelli, the central bank’s next deputy governor, will be responsible for leading the implementation of these recommendations when she takes office in July. The bank said it would provide an update on the proposed changes by the end of the year.
— CNBC’s Elliott Smith contributed to this article.
