(Bloomberg) — Ben Bernanke has asked the Bank of England to consider announcing its outlook for UK interest rates, part of a wider review expected to bring about a “once-in-a-generation” change in how the central bank that makes and communicates its forecasts.
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The former head of the US Federal Reserve said that the BOE could release conditions that show the best way to achieve the 2% inflation target if market values or unchanged policy confuses its messages. The proposal comes alongside 12 separate recommendations that Bernanke made in an 86-page review of the way the BOE presents its economic outlook.
While the analysis stated that the BOE’s outlook during the recent inflation shock was no worse than that of other central banks, it added that the infrastructure supporting the expectations needs to be strengthened. developed rapidly. The report said the BOE should abandon the fan charts that have been at the heart of policymaking for more than two decades.
Policymakers should be “exceptionally clear” when they believe that the market’s expectations for borrowing costs “are not consistent with its outlook,” Bernanke said.
The findings follow a nine-month investigation launched by the BOE after members of the ruling Conservative Party, as well as independent economists, criticized the agency for being slow to act against the negative rate. the most inflation in forty years.
Bernanke said the BOE could learn lessons from that experience. While the BOE’s forecast “got a lot worse,” the recent problems it faced “were not unique,” he said.
BOE Governor Andrew Bailey welcomed the report and said he would pursue a “once-in-a-generation” shake-up of the banking system. He said officials are willing to act on all of Bernanke’s 12 recommendations, but it will take time and more negotiations to develop comprehensive plans.
Paul Dales, chief UK economist at Capital Economics, said it was a “real shame” the review did not clearly recommend that the bank use its profit forecasts instead of market expectations. He said: “Planning interest rates will be the clearest way for the Bank to communicate what it thinks is necessary to achieve the 2% inflation target.”
Dales added that he thought Bernanke was being “generous” in his assessment of the BOE’s forecast errors.
The BOE said it will provide an update on what changes it will make by the end of the year. Clare Lombardelli, who joins the BOE in July as deputy governor for monetary policy, will lead the response. The changes would be phased in and almost put into effect after the next general election, which the opposition Labor party is on track to win.
Bernanke stopped short of suggesting that the nine members of the Monetary Policy Committee mark their rate estimates, as Fed setters do with the “dot plot” estimates he presented to the bank. central US. Several BOE setters have expressed doubts about adopting Fed-style benchmarks in the UK.
“The right example is not going to be a spot on the Fed because the Fed doesn’t have staff discussions with policymakers the way the Bank of England does,” he told reporters ahead of the report’s release. . “In that area, if a bank were to go in this direction, a better example would be the central banks like those of Sweden, Norway, Canada, New Zealand and so on.”
However, he said that the BOE should announce other conditions along with its central forecast, a recommendation that the central bank has vowed to take. “Some situations can help the public better understand the reasons for policy choices,” he said.
“One thing to think about over time is having your own rate forecast,” Bernanke said. Using back-to-back meetings risks “obstructing the interpretation of what the committee is trying to say.”
Although he said that publishing its strategic vision would be “very important” and should be left to “future discussions,” he rejected claims that markets would take either path as a steel commitment. “Although experience shows that the financial markets listen, they pay attention to the rate estimates, they certainly do not consider them as commitments or solid facts. We know that from the Fed,” he said.
Along with the central forecast that uses the market path for interest rates, he said the BOE should announce at least one policy level and one or two risk levels. These can be used to indicate the path of interest rates that the MPC believes is likely. The bank said it would consider the recommendation.
The proposal appears to be similar to how Sweden’s Riksbank operates. It publishes basic economic forecasts supported by other scenarios and outlines policy directions if inflation is weak or strong.
The review units were disappointed with the BOE’s economic methods, infrastructure and communications. The software and models used to generate its estimates are “outdated” and “not adequately maintained.” He said the “temporary adjustments” had created an unstable and inflexible system, which limited the ability of staff to carry out effective inspections.
Bernanke suggested that the BOE replace or completely overhaul the economic model that underpins its forecasts. This will require “a significant increase in staff time and resources.” Bailey said the upgrade is ongoing as part of a $30 million investment in its software and systems.
The former Fed chairman said that fan charts – which show a range of possibilities around its original forecast – should be “eliminated” as they “provide limited information.”
Sanjay Raja, chief UK economist at Deutsche Bank, said the analysis “will not be a game-changer” for the policy but sheds light on “the shortcomings of the model and the lack of transparency of the communication strategy.”
–Courtesy of Andrew Atkinson.
(Updates with reviewer’s comments in paragraph eight.)
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