Bank’s forecasts have ‘significant shortcomings’, warns Bernanke

THE Bank of England’s ability to control inflation has been undermined by “significant shortcomings” in its economic forecasts, an independent review has found.

An assessment led by Ben Bernanke, a former chairman of the US Federal Reserve, warned that the accuracy of its predictions had “deteriorated significantly” in the wake of the pandemic. Andrew Bailey, the Bank’s Governor, vowed to learn from the report but refused to apologise, insisting: “We do not do hindsight.” Mr Bernanke said there had been “deficiencies” in Threadneedle Street’s ability to predict the impact of economic shocks such as Russia’s invasion of Ukraine.

While his review noted this was not unique to the Bank of England, Mr Bernanke insisted that it risked damaging its credibility.

He warned that the Bank’s main economic model was no longer fit for purpose, adding that staff were wasting too much time on “laborious” administrative tasks that ate into the time available for crucial economic analyses.

Welcoming the report’s dozen recommendations, Mr Bailey admitted that the Bank needed to “adapt and develop” its forecasting process as he vowed to learn from its mistakes.

However, when asked if he was sorry, he added: “We do not do hindsight. I don’t think it is appropriate to consider whether we would have made different decisions. Would we have communicated our decisions differently? I think the answer to that is yes, we would.

“I am not using the word blame. It is not about blame. It is about causes. We went through some huge global shocks. They had an effect. We used monetary policy as appropriate to take into account and offset the effects of them.”

Bank staff were making changes as part of a £30m investment and would announce more fundamental reforms to how it communicates its forecasts before the end of the year, he added.

Mr Bailey went on: “It is likely that the global economic environment will continue to be challenging … so we need to adapt and develop and ensure that our forecast is the best it can be.”

He also hinted that the Bank’s communication will be shorter and clearer going forward.

The review recommended replacing or “at a minimum, thoroughly revamping” the Bank’s main economic model and warned that it did not adequately capture shocks from the energy or financial sector.

“The baseline economic model has significant shortcomings,” the review noted.

“These deficiencies in the framework, together with a variety of makeshift fixes over the years, have resulted in a complicated and unwieldy system that limits the capacity of the staff to undertake some useful analysis.”