The Bank of England’s economic forecasting methodologies have come under scrutiny following a detailed review conducted by former US Federal Reserve Chair, Ben Bernanke. The review, prompted by the Bank’s failure to anticipate a post-pandemic inflation surge, revealed that outdated software and inadequate resources have undermined the effectiveness and accuracy of the Bank’s economic models during significant economic shifts.

Identifying a series of deficiencies, Bernanke’s critical assessment points to the reliance on manual processes due to “out-of-date” software, leading staff to perform tasks that could be automated. According to the review, this has contributed to forecasting errors, notably during periods of heightened economic uncertainty such as the recent pandemic and geopolitical tensions like the Ukraine war. The review particularly criticized the Bank’s use of “fan charts,” recommending their discontinuation as they were deemed no longer useful.

Despite some successful forecasting, notably in anticipating inflation trends better than the European Central Bank, the Bank of England was found to lag behind others, such as those of Canada, Norway, and New Zealand. Furthermore, it was highlighted that the BoE was relatively slow in raising interest rates, which exacerbated inflationary pressures.

To address these issues, Bernanke put forward a series of recommendations aimed at modernizing the Bank’s forecasting tools. These include the update and modernization of software, improving the maintenance of economic models, and potentially producing forecasts on interest rates to bolster inflation predictions. In response, BoE Governor Andrew Bailey welcomed Bernanke’s suggestions and stated that the Bank recognized the need for substantial changes to prepare for an unpredictable economic landscape.

In addition to the technical improvements, the review also advised the Bank to enhance transparency and communication regarding its policy decisions and the effects of inflation on these decisions. Bernanke also proposed that the Bank should consider publishing its own long-term interest rate forecasts, a move aimed at refining predictive accuracy without strictly adhering to the dot plot method currently employed by the Federal Reserve.

The revelations and subsequent recommendations from this high-profile review position the Bank of England at a juncture where significant adjustments are necessary to improve its forecasting prowess and, consequently, its ability to navigate and manage the UK economy through turbulent times. Governor Bailey affirmed the Bank’s commitment to implementing all 12 of Bernanke’s recommendations, emphasizing the initiatives already underway to overhaul the Bank’s IT and economic modeling systems.