Yahoo Finance Bernanke Urges BOE to Give Market Clearer Guidance on Rates
(Bloomberg) -- Ben Bernanke called on the Bank of England to consider publishing its own outlook for UK interest rates, part of a sweeping review expected to prompt a “once-in-a-generation” overhaul of how the central bank makes and communicates its forecasts.
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The former US Federal Reserve chair said the BOE could release scenarios that show the best path for meeting the 2% inflation target if market rates or unchanged policy confuse its messaging. The suggestion came alongside 12 separate recommendations Bernanke made in an 86-page review into the way the BOE delivers its economic outlook.
While the review said that the BOE’s forecasts during the recent inflation shock were no worse than those of other central banks, it added that the infrastructure that underpins the projections is in urgent need of an upgrade. The report said that the BOE should scrap the fan charts that have been at the heart of its policymaking for more than two decades.
Policymakers should be “exceptionally clear” when they believe market expectations for borrowing costs are “inconsistent with its view of the outlook,” Bernanke said.
The findings cap a nine-month probe launched by the BOE after members of the ruling Conservative Party, as well as independent economists, criticized the institution for being slow to act against the worst spell of inflation in four decades.
Bernanke said the BOE can learn lessons from the experience. Although the BOE’s forecasts “did indeed worsen significantly,” the recent challenges it faced “were hardly unique,” he said.
BOE Governor Andrew Bailey welcomed the report and said he would pursue a “once-in-a-generation” shake-up of the bank’s practices. He said officials were committed to taking action on all of Bernanke’s 12 recommendations, but it would take time and further consultation to develop detailed plans.
Paul Dales, chief UK economist at Capital Economics, said it is a “real shame” the review didn’t explicitly recommend that the bank uses its own interest rate projections instead of the market’s expectations. “Projecting interest rates would be the clearest way for the Bank to communicate what it thinks is required to hit the 2% inflation target,” he said.
Dales added that he thought Bernanke was “generous” in his assessment of the BOE’s forecasting errors.
The BOE said it would 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. Changes would be phased in gradually and almost certainly implemented after the next election, which the opposition Labour party is on track to win.
Bernanke stopped short of recommending that the nine members of the Monetary Policy Committee chart their forecasts for rates, as Fed rate-setters do through the “dot plot” projections he introduced at the US central bank. Several BOE rate-setters have raised doubts over adopting Fed-style dot plots in the UK.
“The right model would not be the Fed’s dot plot because the Fed does not have the consultation of the staff and the policymakers the way that the Bank of England does,” he told reporters ahead of the report’s publication. “Instead, if the bank were to go in this direction, a better model would probably be central banks like the ones in Sweden, Norway, Canada, New Zealand and so on.”
What Bloomberg Economics Says ...
“Ex-Federal Reserve Chair Ben Bernanke’s review of the Bank of England’s forecasting operation isn’t as ambitious as we’d hoped. He recommended making more use of scenarios. But while he said the BOE should be clearer about the future path of policy, he stopped short of suggesting it publish a rate forecast. That is an opportunity missed. The UK central bank is going to take time to deliver on the recommendations. The changes relating to communications look like they will be a question for markets to grapple with in 2025.”
—Dan Hanson, Ana Andrade and David Wilcox, Bloomberg Economics. Click for the REACT.
However, he said that the BOE should publish alternative scenarios alongside its central forecast, a recommendation the central bank has vowed to take action on. “Alternative scenarios would help the public better understand the reasons for the policy choice,” he said.
“One thing to consider in the long run is having your own forecast for rates,” Bernanke said. Using current conventions risks “clouding the interpretation of what the committee is trying to say.”
While he said publishing its own forecast for policy would be “highly consequential” and should be left to “future deliberations,” he rejected claims that the markets would take any rate path as a cast iron commitment. “While experience shows the financial markets listen, pay attention to the rate projections, they certainly don’t take them as commitment or absolute certainties. We know that from the Fed,” he said.
As well as a central forecast using the market path for interest rates, he said the BOE should publish at least one alternative policy scenario and one or two possible risk scenarios. Those could be used to indicate the path for interest rates the MPC believes is most likely. The bank said it will look into this recommendation.
The proposal appears to be similar to the way Sweden’s Riksbank operates. It publishes a central forecast for the economy supported by alternative scenarios plotting out paths for policy if inflation is weaker or stronger.
Parts of the review were damning about the BOE’s economic models, infrastructure and communications. The software and models used to produce its forecasts are “out of date” and “not adequately maintained.” He said that “makeshift fixes” have resulted in an unwieldy and inflexible system, limiting the ability of staff to conduct useful analysis.
Bernanke recommended that the BOE replace or thoroughly revamp the economic model that underpins its projections. 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 that the fan charts — which show a range of probabilities around its central forecasts — should be “eliminated” as they “convey little useful information.”
Gerard Lyons, a research fellow at the Centre for Policy Studies think tank, said the review was “a damning indictment of how the bank is run – from under-investment in its forecasting infrastructure to major shortcomings in its communication strategies.”
Sanjay Raja, chief UK economist at Deutsche Bank, said the review “won’t be a game changer” for policy but shed light on the “modeling deficiencies and lack of transparency when communicating policy.”
--With assistance from Andrew Atkinson.
(Updates with analyst comment.)
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