The exterior of the Bank of England in the City of London, United Kingdom.
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LONDON — The Bank of England announced a “once in a generation” revision of its inflation forecasts on Friday following a much-anticipated revision by former Federal Reserve Chairman Ben Bernanke.
The review, launched following criticism of the central bank’s recent decisions, sets out 12 recommendations that BoE Governor Andrew Bailey said the bank was committed to implementing.
Bailey told CNBC it had been “invaluable” to compare America’s political perspective with his own.
“This is a unique opportunity to update our forecasts and ensure they are fit for our more uncertain world,” Bailey said.
The recommendations are organized into three key areas: improving the Bank’s forecasting infrastructure, supporting decision-making in the Monetary Policy Committee (MPC), and better communicating economic risks to the public.
They include the removal of the Bank’s long-used fan forecasting system and the introduction of a revamped forecasting framework.
The fan chart – which shows a range of possible future data points – has long been used by the Bank to present the probability distribution that forms the basis of its inflation forecasts. However, the model has come under heavy criticism in recent years for its failure to accurately track inflationary pressures and fully represent the MPC’s range of views.
The review said the charts had “outlived their usefulness” and recommended a new model that better reflected the different views of committee members. He added that the BoE Today, the Central Bank relies more than other central banks on central forecasts, which may not fully take into account broader risks or how inflation expectations may become “unanchored.”
Additionally, the study said the bank needed to improve its communication with the public, suggesting it place less emphasis on central forecasts, simplify its policy statement and reduce repetitiveness. She also said that the ongoing modernization of software used to manage and manipulate data was a “high priority.”
A policy overhaul
The Bernanke Review was launched last summer to assess the Bank’s difficulties in accurately forecasting the huge global rise in inflation that followed Russia’s invasion of Ukraine.
The Bank was widely criticized for being too slow to raise interest rates, meaning it subsequently had to raise its main bank rate to 5.25%, its highest level in 15 years.
With inflation now falling faster than the MPC predicted, some economists have argued that the Bank is making the same mistake in the opposite direction, cutting rates too slowly.
Bernanke added that his role leading the Fed during the global financial crisis highlighted the crucial role of monetary policy on the real economy, but added that the review made “no judgment” on the recent BoE decision-making.
“The effects of the financial sector on the economy go beyond interest rates. Credibility is important. Risk-taking is important,” he told CNBC.
He said forecasting difficulties were not unique to the BoE, but added that he hoped the Bank would learn appropriate lessons from its recent experiences.
The review recommended that the Bank take a phased approach to implementing the new measures, starting with improving its forecasting infrastructure. It should then proceed “cautiously” to adopt changes in its policy decisions and communications, he added.
The BoE’s new deputy governor, Clare Lombardelli, has been tasked with 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.
—Elliott Smith of CNBC contributed to this article.
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