The Bank of England's efforts to control inflation have been hindered by “significant shortcomings” in recent years, a report by former Federal Reserve chair Ben Bernanke has found.
Bernanke said the accuracy of predictions by Britain’s central bank had “deteriorated significantly” since the pandemic.
Outdated software and a failure to consult staff, themselves often inexperienced and overworked, were cited as reasons for “deficiencies” in policy maker’s forecasting.
This included economic shocks such as Russia’s invasion of Ukraine, with Bernanke noting the issues were not unique to the Bank of England, but risked its credibility.
“The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique," Bernanke said.
“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."
Bank of England governor Andrew Bailey welcomed the review, which also set out 12 recommendations.
“We do not do hindsight. I don’t think it is appropriate to consider whether we would have made different decisions,” he said.
“Would we have communicated our decisions differently? I think the answer to that is yes we would.”
The 12 recommendations
- Data System Modernisation: Prioritize the upgrade of data management software to enhance the accessibility and utility of comprehensive economic data, and consider hiring additional data specialists.
- Model Maintenance and Development: Regularly update and refine economic models to ensure they remain robust and reflective of current data, requiring more resources and better staff integration.
- Forecasting Framework Overhaul: Conduct a thorough review and potentially revamp the existing forecasting models to better integrate automated processes and accommodate complex economic scenarios.
- Enhanced Economic Modelling: Incorporate detailed and realistic economic models that cover various aspects of the UK economy, including monetary transmission, inflation expectations, and sector-specific dynamics.
- Reduction of Incrementalism: Regularly reassess models and assumptions to minimize over-reliance on incremental updates and ensure timely adaptation to economic changes.
- Personnel Policy Improvement: Adjust personnel policies to better reward deep expertise and sustained performance in specialized areas, including more significant roles for PhD holders in forecasting.
- Integration of Alternative Scenarios: Systematically use alternative scenarios in policy discussions to compare different policy impacts and address potential risks.
- Publication of Alternative Scenarios: Publish selected alternative scenarios alongside the central forecast to provide deeper insights into policy decisions and economic outlooks.
- Reassessment of Forecast Assumptions: Communicate clearly when the central forecast's underlying assumptions do not reflect the MPC's views and adjust the emphasis in public communications accordingly.
- Simplification of Policy Summaries: Streamline Monetary Policy Summaries by focusing more on qualitative descriptions and less on quantitative specifics to enhance clarity and relevance.
- Abandonment of Fan Charts: Replace fan charts with more straightforward, qualitative discussions of uncertainties and risks due to their historical inaccuracies and conceptual shortcomings.
- Phased Implementation Strategy: Adopt a phased approach to these reforms, starting with infrastructural improvements and gradually implementing changes in policy formulation and communication.