Bernanke urged the Bank of England to give clearer guidance to the market on interest rates

Bernanke urged the Bank of England to give clearer guidance to the market on interest rates

Ben Bernanke called on the Bank of England to consider publishing its own outlook for UK interest rates as part of a sweeping review that is expected to prompt a "once-in-a-generation" overhaul of the way it makes and communicates forecasts.

The former head of the Federal Reserve said that if market interest rates or unchanged policy confuse its message, the Bank of England may release a scenario showing the best path to achieve its 2% inflation target. In the 86-page report, Bernanke also made 12 separate recommendations on how the Bank of England should issue its economic outlook.

While the review said the Bank of England's projections during the recent inflation shock were no worse than those of other central banks, it added that the infrastructure underpinning those forecasts was in dire need of an upgrade. The report said the Bank of England should scrap the sector chart that has been at the heart of its policymaking for more than 20 years.

Bernanke said policymakers should be "extra clear" when they believe the market's expectations of borrowing costs are "inconsistent with their view of the outlook."

The Bank of England (BOE) launched a nine-month investigation after members of the ruling Conservative Party and independent economists criticized the institution for being slow to tackle the worst inflation in 40 years.

Bernanke said the Bank of England could learn from the experience. He said that while the BoE's forecasts "did deteriorate significantly", the recent challenges it faced were "hardly the only ones".

Bank of England Governor Andrew Bailey welcomed the report and said he would make a "once-in-a-generation" overhaul of the bank's practices. Officials are committed to acting on Bernanke's 12 recommendations, but developing a detailed plan will take time and further consultations, he said.

Paul Dales, chief UK economist at Capital Economics, said it was a "real shame" that the review did not explicitly advise the bank to use its own interest rate forecasts rather than what the market expected. "Projecting interest rates would be the clearest way for the bank to communicate what it thinks is needed to reach its 2% inflation target," he said. ”

Dyers added that he thought Bernanke was "generous" in assessing the BoE's forecast error.

For most of the past three years, inflation has exceeded the Bank of England's forecasts

The Bank of England said it would provide an update on what changes will be made by the end of the year. Clare Lombardelli, who will join the Bank of England in July as Deputy Governor for Monetary Policy, will lead the response. The reforms will be implemented gradually, almost certainly after the next election, in which the opposition Labour party is expected to win.

Mr. Bernanke did not suggest that the nine members of the Monetary Policy Committee plot their forecasts for interest rates, as he did in the Fed's "dot plot" projections. Several rate-setters at the Bank of England have questioned the adoption of Fed-style dot plots in the UK.

"The right model wouldn't be a dot plot for the Fed because the Fed didn't consult staff and policymakers like the Bank of England did," he told reporters ahead of the report. "Conversely, if central banks were to go in this direction, a better model might be central banks in Sweden, Norway, Canada, New Zealand, etc. ”

Ben Bernanke, the former head of the Federal Reserve, assessed the Bank of England's forecasting operations not as ambitious as we would like. He suggested making more use of scenarios. But while he said the BoE should have a clearer picture of the future policy path, he did not advise the BoE to issue interest rate forecasts. This is a missed opportunity. The Bank of England will need time to implement these recommendations. Communication-related changes seem to be an issue for the market to deal with in 2025. ”

However, he said that the Bank of England should release other scenarios at the same time as the central forecast, and the central bank has promised to act. "Other circumstances will help the public better understand the reasons for policy choices," he said. ”

"One of the things to consider in the long run is to have your own projections for interest rates," Bernanke said. The use of the current convention has the potential to "obscure the interpretation of what the Committee is trying to express".

While he said that the release of the Fed's own policy projections would be "significant" and should be left to "future consideration", he dismissed the suggestion that the market would see any path of interest rates as an ironclad commitment. While experience has shown that financial markets listen and pay attention to interest rate forecasts, they certainly do not see them as promises or absolute certainty. We know this from the Federal Reserve," he said.

In addition to using the market interest rate path for core forecasting, he said, the BoE should also publish at least one alternative policy scenario and one or two possible risk scenarios. These can be used to indicate what the MPC considers to be the most likely path for interest rates. The bank said it would look into the proposal.

The proposal appears to be similar to how the Riksbank operates. It publishes core forecasts for the economy and charts policy paths in the event of weaker or stronger inflation, supported by other scenarios.

Part of the report slammed the Bank of England's economic model, infrastructure and communications. This includes the software and models used to generate predictions that are "outdated" and "not adequately maintained". He said that "expediency" had led to a clunky and inflexible system that limited the ability of staff to conduct useful analysis.

Bernanke suggested that the Bank of England replace or overhaul the economic model underpinning its forecasts. This will require a "significant increase in staff time and resources". Bailey said the upgrade was underway as part of a £30 million investment in its software and systems.

The former Fed chair said sector charts – which show a range of probabilities around its core projections – should be "eliminated" because they "convey very little useful information".