THE Bank of England was today handed 12 recommendations to improve its forecasting skills by former US Federal Reserve chair Ben Bernanke.
The Bank, which sets interest rates and aims to control inflation, came under fierce criticism for being too slow to recognise how quickly prices would rise after Russia’s invasion of Ukraine.
Many City experts insisted it was obvious the Bank, on Threadneedle Street in the City, should have moved more quickly to put rates up.
It asked Bernanke to review its procedures, a report that has just been released.
That report found “serious problems” in the “deficiencies of the Bank’s forecasting infrastructure”.
Key software is out of date and insufficient resources are used to update models.
The Bank’s fixes to this issue have been “makeshift”, Bernanke said.
The Bank also needs more “detailed models of the financial sector, the housing sector and other key components of the UK economy”.
Ben Bernanke said: "The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique. Still, they have served as a stress test of forecasting at the Bank. The Bank, like other central banks and policy institutions, will be working to draw the appropriate lessons from this experience. The goal of this review is to assist in this effort."
The report will be seized on by critics of the Bank which argue it has failed in its mission too often.
Bernanke wants the Bank to ditch its so-called “fan charts” which aim to predict growth and inflation under different scenarios. These charts have “outlived their usefulness” and “should be eliminated”.
Andrew Bailey, Governor of the Bank of England said: “We welcome this important Review and its recommendations. This is a once in a generation opportunity to update our approach to forecasting, and ensure it is fit for our more uncertain world. We have set out our initial response today, and are committed to taking action on all of Dr Bernanke’s recommendations.”
Paul Dales of Capital Economics said: “It’s a shame Bernanke stopped short of recommending the Bank publishes projections for interest rates.”
The Bank may soon pull interest rates down if inflation hits its 2% target.
Recent inflation figures from the US may force it to hold off for a while longer, however.
The full report is available here.
In the Bank’s response, it notes that at times of “large and unprecedented shocks” to the economy, forecasting is more difficult.
The bank’s full response is here.
