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The Bank of England recently announced a major overhaul of its inflation forecasting system following a review by former Federal Reserve Chair Ben Bernanke. The review, initiated after criticism of the bank’s policymaking during a period of spiraling inflation, sets out 12 recommendations for improvement. BOE Governor Andrew Bailey emphasized the importance of updating the forecasting system to better reflect the uncertainties in the current economic climate and ensure it is fit for purpose.

Bernanke’s recommendations focus on improving the bank’s forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC), and enhancing communication of economic risks to the public. One key aspect of the recommendations is the scrapping of the bank’s long-standing “fan chart” forecasting system in favor of a revamped forecast framework. The fan chart, which presents a range of possible future data points, has faced criticism for its inability to accurately track inflationary pressures.

While Bernanke did not recommend adopting the Fed-style “dot plot” forecasting used in the U.S., he suggested a new model that reflects the differing views of MPC members and considers how inflation expectations can become “de-anchored.” The review also highlighted the need for the bank to supplement its analysis with a wider range of alternative scenarios to help the public better understand policy choices. The recommendations aim to improve the bank’s communication with the public, simplify its policy statements, and reduce repetitiveness.

The Bernanke review was prompted by the Bank of England’s struggles to accurately project the sharp increase in global inflation following Russia’s invasion of Ukraine. The bank faced criticism for being slow to raise interest rates, leading to subsequent hikes to a 15-year high of 5.25%. Now, as inflation falls faster than expected, there are concerns that the bank may be cutting rates too slowly. Bernanke emphasized the importance of monetary policy on the real economy and stressed the need for credible and risk-aware decision-making.

The review recommended a phased approach to implementing the proposed changes, starting with improving the bank’s forecasting infrastructure before moving on to changes in policymaking and communications. Incoming BOE Deputy Governor Clare Lombardelli will lead the implementation of the recommendations, with updates on the proposed changes expected by the end of the year. Overall, the objective of the overhaul is to enhance the bank’s forecasting capabilities, decision-making processes, and communication strategies in order to better navigate the uncertainties of the current economic environment.

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