Bank of England forecasts undermined by out-of-date methods, report finds

The Bank of England’s recent record of forecasting inflation and the path of interest rates was undermined by out-of-date methods and a failure to communicate clearly with the public, according to a bruising independent assessment.

The report by the former US Fed boss Ben Bernanke said the Bank spent much of its time attempting to justify its poor judgment rather than admit its failures and change course.

Accusing the Bank of appearing to “at times suffer from excessive incrementalism”, he said policymakers had raised rates slowly over the past two years when inflation was already rising beyond normal levels.

Bernanke said the Bank relied on old software to process information and failed to consult staff who were often overworked and inexperienced, leading to “significant shortcomings”.

Setting out 12 recommendations, Bernanke said the forecasting errors by the Bank “were hardly unique” among central banks in the developed world.

The Bank of England was the first to react to rising inflation when it began raising interest rates in December 2021, long before the US Federal Reserve or the European Central Bank.

However, Bernanke’s criticism centres on a resistance inside Threadneedle Street to ramping up its efforts in the summer of 2022, when sanctions against Russian oil and gas and a blockade of Ukrainian wheat after Moscow’s invasion triggered a dramatic rise in the cost of energy and food.

The Bank persisted with incremental increases in interest rates while other central banks moved swiftly to raise the cost of borrowing with a view to restricting spending and bringing inflation back to their target.

The Bank of England aims to maintain the consumer prices index (CPI) at 2 percent and must explain to the chancellor when the CPI rises above 3 percent. Inflation soared throughout 2022, peaking that November at 11.1 percent. It has come down slowly since and remains above target at 3.4 percent.

Bernanke, who steered the Federal Reserve through the 2008 financial crisis, said Bank staff had used “human judgments that paper over problems with the models”.

He said the economic models used by the Bank should be revamped to incorporate “more qualitative descriptions of risks and uncertainty surrounding the outlook”.

The in-depth study was not asked to comment on the Bank’s policy decisions, but to examine how the Bank assessed the outlook for the economy and how that affected its decision-making.