MNI INTERVIEW:Tough For BOE To Agree Scenarios-NIESR's Millard

It will be tough for the nine members of the Bank of England’s Monetary Policy Committee to agree on parameters for providing regular scenario analysis as recommended by former Fed chair Ben Bernanke in his review of the BOE’s forecasting and communications, the deputy director at the National Institute of Economic and Social Research told MNI.

Where Bernanke did make formal recommendations when presenting his review earlier in April, including an end to the use of fancharts in the BOE’s Monetary Policy Reports, the Bank has committed to carrying out work towards implementing them, and said it would review progress at the end of the year. But some tasks will prove more challenging, such as a potential shift to more use of scenarios, noted Stephen Millard.

While the MPC already discusses scenarios as part of its regular forecast round, the Bernanke Review provided little guidance as to which of the range of purposes for which they can be used, including setting out the consequences of plausible shocks or illustrating alternative monetary policy responses to the Bank's modal forecast, would be appropriate. (See MNI INTERVIEW: Clear Case For BOE Alternative Scenarios - Bean)

The optimal solution would be for Bank economists to take control of the central forecast and for MPC members to select scenarios and set out their policy choices, according to Millard, formerly a senior manager at the Bank.

"Trying to get nine people to agree on a forecast, on a scenario and on an interest rate path, I think that is an issue. Which is why, for me, I would take the forecast, I'd put the forecast in the hands of the Bank and make clear it's a staff forecast.” he said in an interview. “The MPC can help choose the scenarios and then the MPC can comment individually on ... what's driving their actual decisions by making reference to the Report and that, in many ways, I think would help communication.”

Monetary policy statements could then be shorter and more to the point as Bernanke suggested, to better explain where policy is coming from, Millard added.

SCHNABEL SPEECH

In the current forecast process, MPC members' judgements can influence the central forecast, muddying the waters, he said. European Central Bank Executive Board member Isabel Schnabel made a similar case for a clear division between policy and forecast in a recent speech, saying that where the projection process is delegated to staff "policy judgement should ideally be the outcome of deliberations rather than an input to the baseline scenario."

In contrast, scrapping the BOE’s current fan charts, which Bernanke said had outlived their usefulness and should be scrapped, should be easy, because the Bank could simply produce the central forecast with an assessment of the level of uncertainty and whether the risks are to the upside or downside, to give a variance and a skew.

But, Millard said, "what is important is that they replace it with something and that something is scenario analysis. And that requires more of a conversation.”

Bernanke, while strongly advocating less emphasis on the central forecast, did not make any formal recommendation as to whether the Bank should publish an in-house rate projection, something which has previously been opposed by some current MPC members, including Deputy Governors Ben Broadbent and Dave Ramsden.

"Certainly within the Bank the feeling is it's not a good idea. And the argument is still the same one - that they are really worried that people will pay too much attention to that and will think that's a promise ... It's just very hard to change the Bank view that the general public will view it as a promise," Millard said.