MNI: Bernanke Review Tells BOE To Shift To Scenario Analysis

The Bank of England should stop highlighting its central economic scenario in a single fan chart and instead move to scenario analysis and consider publishing its own in-house rate projection, former Federal Reserve head Ben Bernanke said in his review of the Bank’s forecasting and communication.

The BOE said as the review was published on Friday that it would accept all twelve of Bernanke’s recommendations, which include thorough modernization of outdated forecasting technology, although the key reforms will have to be phased in. The Bank said it would review progress at the end of the year.

The BOE’s hallmark approach in its quarterly forecasts, contained in the Monetary Policy Reports, has been to publish a modal, or most likely, path for growth and inflation based on market and constant rate paths with a fan of probabilities around them. Bernanke told the Bank to scrap this.

“The fan charts …have weak conceptual foundations … and receive little attention from the public. They should be eliminated,” Bernanke said.

He said that the Bank should “de-emphasise the central forecast based on the market rate path” by regularly publishing alternative scenarios and that it should come up with more succinct summaries of the risks around the most likely outcome. (See MNI INTERVIEW: Clear Case For BOE Alternative Scenarios - Bean)

IN-HOUSE RATE PROJECTION

Producing an in-house rate would be “a more aggressive approach” to tackling the problem of publishing a central forecast based on what can be unrealistic assumptions but Bernanke left it open to the Bank to decide whether it wants to do this, saying it would be a matter for “future deliberations.”

Bernanke told reporters that if the Bank did decide to publish in-house rate projections it should “not be the Fed dot plots” but instead something akin to the collective rate path used by the Riksbank and others.

He dismissed the prior BOE view that rate projections risk being seen as promises and pointed to successful examples of other central banks publishing their own paths. However he made no formal recommendation on that point. (See MNI POLICY: Bernanke Review Looks At BOE Rate Path, Scenarios)

Bernanke also highlighted the shortcomings of the Bank’s existing core model and the limitations of its forecasting software, with inadequate information technology having hampered scenario analysis until now.

One assumption that Bernanke wanted to see ditched in the Bank’s main model was that longer-term inflation expectations are always well-anchored on the 2% inflation target. It should place greater weight on supply side developments, such as labour shocks, he said.