Bank of England must fix forecasts and technology, former Fed chief
Bernanke says
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[April 12, 2024] By
David Milliken and William Schomberg
LONDON (Reuters) - The Bank of England should overhaul its economic
forecasting by scrapping communication tools that have been in place for
a generation and upgrading "seriously out of date" technology, former
Federal Reserve chair Ben Bernanke said.
Bernanke advised the BoE to publish more alternative scenarios for the
economy, rely less on market expectations of interest rate moves for its
forecasts and undertake other measures to improve its forecasting
abilities.
But in a review published on Friday he stopped short of a more radical
alternative of the BoE publishing its own forecast for where interest
rates might head, saying that should be left for future discussion.
The eight-month review, commissioned by the BoE's oversight body, came
after a surge in inflation to its highest levels in more than 40 years
in 2022 turned a spotlight on the central bank's inner workings.
"While the accuracy of the BoE's forecasts has deteriorated
significantly in the past few years, forecasting performance has
worsened to a comparable degree in other central banks and among other
UK forecasters," Bernanke concluded.
British consumer price inflation surged above 11% in October 2022, after
Russia's invasion of Ukraine and post-pandemic bottlenecks.
Some politicians and economists criticized the BoE for only starting to
raise interest rates in December 2021, when inflation was already above
target. The BoE has said an earlier start would have made little
difference.
Bernanke described the BoE's failure to foresee the surge in inflation
as "probably inevitable" due to "unique circumstances", and added that
comparing the quality of central banks' interest rate decisions had not
been within his remit.
The biggest failure was in the BoE's forecasting software which he said
was "out of date and lacks important functionality," he said.
The central bank's central forecasting model had "significant
shortcomings" that made it hard for staff to produce alternative
economic scenarios and needed "replacing, or, at a minimum, thoroughly
revamping".
Bernanke said the BoE should eliminate its long-standing 'fan chart',
which shows a range of possible future paths for inflation and growth
based on a single set of assumptions.
Instead, the BoE should give a more qualitative assessment of risks and
publish alternative scenarios that illustrate how the BoE might change
interest rates if the economy did not develop as expected, and what
impact these changes would have.
Governor Andrew Bailey said work was already underway to improve the BoE
data platforms, which should be done in the next year or so, and that
policymakers would set out further steps on communication by the end of
this year.
[to top of second column] |
Former Federal Reserve Chair Ben Bernanke speaks after he was named
among three U.S. economists awarded the 2022 Nobel Economics Prize,
during a news conference at the Brookings Institution in Washington,
U.S., October 10, 2022. REUTERS/Ken Cedeno/File Photo
NO 'DOT PLOT'
Bernanke, who was head of the Fed from 2006 to 2014, did not
recommend that the BoE move closer to the U.S. central bank's 'dot
plot' where each rate-setter anonymously publishes their own
forecasts for interest rates, growth and inflation.
The BoE, unlike the Fed and the Swedish and Norwegian central banks,
does not publish its own interest rate forecasts.
Bernanke said doing this would be "a more aggressive approach" and
rate forecasts - collective or individual - would be "highly
consequential" should be left for future debate.
If the BoE did go down this route, it would be better to produce a
single rate projection, as Scandinavian banks do, rather than a Fed
dot plot with individual policymaker views, he said.
Some senior BoE officials have previously opposed rate forecasts,
worrying they would be misinterpreted as a commitment rather than a
best guess which was likely to change.
Bernanke said this had not been his experience at the Fed, or a
major problem for Sweden or Norway, though it did put pressure on
policymakers to give a medium-term view even when they were
uncertain.
“The problem with rate projections is they force you to take a stand
when perhaps you don’t feel it is really appropriate," he told
reporters.
The BoE currently produces two sets of projections for inflation,
growth and unemployment. One is based on interest rates staying
unchanged, and the other on what financial markets think will happen
to borrowing costs over the next three years - similar to the
European Central Bank's approach.
Investors often look at the BoE's forecast for inflation two years
ahead to get a sense of whether the central bank thinks the market
path for interest rates is too high or too low.
Some former officials dislike this for locking the central bank into
making forecasts which are based on interest rate assumptions that
the policymakers themselves do not believe.
Bernanke said the BoE should de-emphasize forecasts based on market
rate assumptions and be "exceptionally clear" when policymakers
disagreed with them, or other assumptions.
Alternative scenarios or explicit changes to the assumptions, could
be a way to do this.
Tweaking the main forecast output to conform more with what
policymakers thought was likely was another option, but "has the
significant disadvantage of sending inaccurate signals to market
participants," Bernanke said.
(Reporting by David Milliken and William Schomberg)
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