Boe’s big mis­takes in fore­cast­ing war­rants in­quiry

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LON­DON

The Bank of Eng­land’s fore­cast­ing ca­pa­bil­i­ties have de­te­ri­o­rated in the past five years, re­sult­ing in large er­rors, and of­fi­cials should in­ves­ti­gate the rea­sons for such short­com­ings, an in­de­pen­dent re­view said Fri­day.

The re­port by David Stock­ton, a for­mer Fed­eral Re­serve of­fi­cial, sets out op­tions in­clud­ing en­cour­ag­ing “more as­sertive” staff to chal­lenge the cen­tral bank’s “house view” and in­cor­po­rat­ing fi­nan­cial-sta­bil­ity risks into fore­casts. It said the lat­ter should be “high on the agenda.” The re­view is one of three com­mis­sioned by the cen­tral bank’s gov­ern­ing body fol­low­ing a law­maker push for an in­quiry as the BoE pre­pares to take on un­prece­dented pow­ers to reg­u­late the fi­nan­cial sys­tem. The bank also re­leased re­ports on its frame­work for pro­vid­ing liq­uid­ity to the fi­nan­cial sys­tem and its emer­gency sup­port to banks. “The Mone­tary Pol­icy Com­mit­tee’s re­cent fore­cast per­for­mance has been no­tice­ably worse than prior to the cri­sis, and marginally worse than that of out­side fore­cast­ers,” Stock­ton said. “The bank and the MPC need to in­tro­spect more deeply and more sys­tem­at­i­cally about the lessons that can be gleaned from episodes of large fore­cast er­rors.”

Bank of Eng­land Gover­nor Mervyn King and deputy gov­er­nors Charles Bean and Paul Tucker said in a state­ment the re­ports “have given us a great many ideas to con­sider that could im­prove the bank’s per­for­mance.” An­drew Tyrie, the head of the Par­lia­men­tary com­mit­tee that scru­ti­nizes the BOE, said the re­ports are a “step for­ward,” though he crit­i­cized the cen­tral bank’s man­age­ment. “A com­pre­hen­sive re­view should al­ready have taken place,” Tyrie said. “The fact that it took so long to ob­tain even these re­ports il­lus­trates the bank’s de­fec­tive gov­er­nance.” The MPC’s pro­jec­tions for growth and in­fla­tion were too op­ti­mistic, Stock­ton said. The ex­pla­na­tions for the er­rors, such as un­der­es­ti­mates for the in­fla­tion­ary ef­fect of the de­pre­ci­a­tion of sterling, or the scale of the squeeze in credit pro­vi­sion, are “per­sua­sive,” he said. Still, the “se­rial per­sis­tence” of er­rors needs fuller anal­y­sis.

“That per­sis­tence could sim­ply re­flect a string of bad luck, but it also could re­flect some in­er­tia im­parted by the fore­cast process or point to prob­lems with the par­a­digm un­der­ly­ing the bank’s fore­casts,” he said. There has been a “lack of sys­tem­atic, de­tailed quan­ti­ta­tive anal­y­sis un­der­taken by the bank to in­ter­ro­gate its fore­cast er­rors.”

The Bank of Eng­land will have new fore­casts at its pol­icy meet­ing next week that it will pub­lish on Nov. 14. The Na­tional In­sti­tute of Eco­nomic and So­cial Re­search cut its 2013 U.K. growth fore­cast to­day to 1.1 per­cent from 1.3 per­cent.

The Lon­don-based group said the econ­omy will shrink 0.1 per­cent this year, less than the 0.5 per­cent expected pre­vi­ously. UK con­struc­tion un­ex­pect­edly ex­panded in Oc­to­ber, ac­cord­ing to a re­port to­day from Markit Eco­nom­ics. It said its gauge rose to 50.9 from 49.5 in Septem­ber. In the euro area, a fac­tory in­dex by Markit fell to 45.4 from 46.1, where read­ings be­low 50 in­di­cate con­trac­tion. Later Fri­day, a US La­bor Depart­ment re­port may show the na­tion’s job­less rate rose to 7.9 per­cent in Oc­to­ber.

Payrolls grew by 125,000 work­ers last month fol­low­ing a 114,000 gain, the sur­vey showed. Stock­ton’s observations on the BOE re­vealed “no deep struc­tural prob­lem” and noth­ing that re­quires ur­gent ac­tion. His 21 op­tions to im­prove the fore­cast­ing process in­clude do­ing more to re­tain staff, pro­vid­ing more data to sup­port the pro­jec­tions and pub­lish­ing in­di­vid­ual MPC mem­bers’ pro­jec­tions.

— ON­LINE

KARACHI: Pres­i­dent Asif Ali Zar­dari chair­ing a meet­ing on var­i­ous road projects in Sindh at Bi­lawal House.

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