HomeBusinessBank of England to revamp forecasting methods following unexpected inflation outcomes.

Bank of England to revamp forecasting methods following unexpected inflation outcomes.

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The Bank of England is undergoing a major review of its economic forecasting process after facing criticism for underestimating inflation amidst turbulent times, including a pandemic and surge in inflation. Governor Andrew Bailey described this as a “once-in-a-generation opportunity” to update their approach, given the ongoing uncertainty in the world. Former Federal Reserve chair Ben S. Bernanke was tasked with leading the review, resulting in 12 recommendations aimed at improving the accuracy of the bank’s forecasts.

One of the key issues highlighted in the review was the combination of the rapidly changing economy and flaws in the forecasting process that led to major errors in the Bank of England’s predictions. The importance of accurate forecasts is crucial for guiding monetary policy decisions, especially in maintaining price stability and targeting inflation at 2 percent annually. The review emphasized the need for significant investment in data, modeling, and staff to support the revised forecasting approach, which will take time to implement.

The central bank’s forecasting errors were attributed to a series of economic shocks that overwhelmed the existing monetary policy framework, from Brexit to pandemic lockdowns and a surge in energy prices. The review also identified outdated software and significant shortcomings in the economic model as key problems hindering the effectiveness of the bank’s forecasts. Moving forward, the bank plans to put less emphasis on the central forecast for inflation and incorporate alternative scenarios more frequently to better capture risks and uncertainties in the economic outlook.

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