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BEN Bernanke called on the Bank of England to consider using its own outlook for interest rates to improve its forecasts and communication with both investors and the general public.
The former US Federal Reserve chair said the UK central bank should publish scenarios that show the best path for meeting the 2 per cent inflation target if market rates or an unchanged policy don’t deliver the aims. The suggestion came alongside 12 other recommendations Bernanke made in an 86-page review into the way the BOE delivers its forecasts and communications.
He also told the BOE the way it makes its forecasts is in urgent need of an upgrade and that it should scrap fan charts that have been at the heart of its outlooks for more than two decades. The economist said policymakers should be “exceptionally clear” when they believe market expectations for borrowing costs rates are “inconsistent with its view of the outlook.”
The findings cap a nine-month probe the BOE asked for after members of Parliament from across the political spectrum and independent economists faulted the institution for being slow to act against the worst spell of inflation in four decades. Bernanke said the BOE can learn lessons from its experience, but he said that its forecasts were no worse than other major central banks or private sector economists.
BOE governor Andrew Bailey welcomed the report and said he would pursue a “once in a generation” overhaul of the bank’s practices. He said officials are “committed to taking action” on all of Bernanke’s suggestions, but it would take time and further consultation to develop detailed plans.
The BOE said it will provide an update on what changes it will make by the end of the year. Clare Lombardelli, who joins the BOE in July as deputy governor for monetary policy, will lead the response. Changes will be phased in gradually.
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“The forecasting and policy challenges faced by the BOE in recent years were hardly unique, as peer central banks faced similar shocks and dealt with similar challenges,” Bernanke said.
Bernanke stopped short of recommending that nine members of the Monetary Policy Committee chart their forecasts for rates, as Fed rate-setters do through the “dot plot” projections he introduced at the US central bank.
However, he said that the BOE should publish alternative scenarios alongside its central forecast, a recommendation the central bank has vowed to take action on.
“One thing to consider in the long run is having your own forecast for rates,” Bernanke said. Using current conventions can “lead to clouding the interpretation of what the committee is trying to say.”
“Showing the outlook conditional on one or more alternative rate paths would both provide comparisons of the effects of alternatives policies and reinforce verbal guidance by the bank,” he added in his review. “The publication of selected alternative scenarios in the Monetary Policy Report, along with the central forecast, would help the public better understand the reasons for the policy choice.”
In addition to the standard forecast using the market path for interest rates, he said the BOE should publish at least one alternative policy scenario and one or two possible risk scenarios. Those could be used to indicate the path for interest rates the MPC believes is most likely. The bank said it will look into this recommendation.
The proposal appears to be similar to the way Sweden’s Riksbank operates. It publishes a central forecast for the economy supported by alternative scenarios plotting out paths for policy if inflation is weaker or stronger.
Parts of the review were damning about the BOE’s economic models, infrastructure and communications. The software and models used to produce its forecasts are “out of date” and “not adequately maintained.” He said that “makeshift fixes” have resulted in an unwieldy and inflexible system, limiting the ability of staff to conduct useful analysis.
Bernanke recommended that the BOE replace or thoroughly revamp the economic model that underpins its projections. This will require a “significant increase in staff time and resources.”
He said that the fan charts – which show a range of probabilities around its central forecasts – should be “eliminated” as they “convey little useful information.”
The decision to hold a review came after the BOE faced fierce criticism for misjudging the scale and persistence of the inflation shock, including from Members of Parliament in Rishi Sunak ’s ruling Conservative party. Some MPs, including David Davis and Suella Braverman, have suggested the government look at withdrawing the BOE’s independence.
However, since the review was launched last July, inflation has halved from 6.8 per cent to 3.4 per cent in the latest data for February. The BOE expects it to slip below its 2 per cent target in April’s data, though it is still wary over declaring victory because of sticky underlying pressures and rapid wage growth.
Several BOE rate-setters have raised doubts over adopting Fed-style dot plots in the UK. Bailey said he was in “two minds” about dot plots, while external rate-setter Catherine Mann said the BOE does better than them by revealing individual votes and following up with speeches and interviews. Megan Greene, another external policymaker, cautioned that the markets “do not understand dot plots as they are intended.” BLOOMBERG
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