The Bank of England has announced a major overhaul of its inflation forecasting following a review led by former Federal Reserve Chair Ben Bernanke. The review, initiated after criticism of the central bank’s policymaking during a period of spiraling inflation, sets out 12 recommendations that the bank plans to implement. These recommendations focus on improving forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC), and better communicating economic risks to the public. The goal is to update the bank’s forecasting to be more relevant in today’s uncertain world.
One of the key recommendations is to scrap the bank’s long-standing “fan chart” forecasting system and introduce a revamped forecast framework. The fan chart, which shows a range of possible future data points, has faced criticism for failing to accurately track inflationary pressures. Bernanke’s review suggests a new model that better reflects the differing views of committee members and how inflation expectations can become “de-anchored.” The review also recommends providing a wider range of alternative scenarios to help the public understand the reasons behind policy choices.
The Bernanke review was prompted by the bank’s struggles to accurately project the significant global spike in inflation following Russia’s invasion of Ukraine. The bank was criticized for being slow to hike interest rates, leading to a subsequent increase to a 15-year high of 5.25%. With inflation now falling faster than anticipated, there are concerns that the bank may be cutting rates too slowly. Bernanke noted the critical role of monetary policy on the real economy but made no judgment on the BOE’s recent decision-making.
The review recommended a phased approach to implementing the new measures, starting with improving forecasting infrastructure and then cautiously moving on to changes in policymaking and communications. Incoming BOE Deputy Governor Clare Lombardelli will lead the implementation of these recommendations starting in July. The bank plans to provide an update on the proposed changes by the end of the year. The goal of the overhaul is to ensure that the bank’s forecasting is more accurate and relevant in today’s complex and uncertain economic environment.
Overall, the Bernanke review of the Bank of England’s inflation forecasting system aims to modernize and improve the bank’s ability to accurately project and communicate economic risks to the public. By scrapping the fan chart forecasting system and introducing a new model that better reflects differing views, the bank hopes to make better policy decisions and communicate them more effectively. The review was prompted by the bank’s struggles to accurately project inflation during a period of global economic uncertainty, and the recommendations are intended to help the bank navigate future challenges and improve its forecasting capabilities.
