By David Milliken
LONDON, – Former Federal Reserve Chairman Ben Bernanke will outline on Friday how the Bank of England should reform its economic forecast, after a rise in inflation to its highest levels in more than 40 years turned the spotlight on the inner workings of the central bank. .
The eight-month review, commissioned by the BoE’s court of directors and due at 1100 GMT, is likely to recommend scrapping some of the ways the British central bank has communicated its thinking since it gained operational independence in 1997.
However, it is unlikely to prompt any immediate change in the BoE’s assessment of the economy.
“Ultimately, we do not expect the Bernanke review to be a game changer for markets, or to impact the direction of near-term policy,” Sanjay Raja, an economist at Deutsche Bank, said in a note to clients last week.
Investors expect two quarter percentage point rate hikes from the BoE this year, starting in August or September. The central bank expects inflation to fall below its 2% target in the coming months – down from a peak of 11.1% 18 months ago – before rising later this year, along with weak growth.
BoE Governor Andrew Bailey told the Financial Times last month that he expected the central bank’s long-running “fan chart”, which shows a range of possible future paths for inflation and growth based on a single set of assumptions, to be “retired”. .
Instead, the BoE may publish more inflation and growth forecasts based on current scenarios – for example, if shipping costs jumped or wage growth did not slow as expected.
‘POINT PLOT’ UNPROOF
A bigger question is whether Bernanke, who was head of the Fed from 2006 to 2014, will recommend that the BoE move closer to the U.S. central bank’s “dot plot,” where each ratemaker anonymously publishes its own forecasts of interest rates, growth and inflation.
The BoE, unlike the Fed and the Swedish and Norwegian central banks, does not publish its own interest rate forecasts.
Instead, it produces two sets of projections for inflation, growth and unemployment. One is based on interest rates remaining unchanged, and the other on what financial markets think will happen to borrowing costs over the next three years – similar to the European Central Bank’s approach.
Investors often look to the BoE’s inflation forecast two years ahead to understand whether the central bank thinks the market path for interest rates is too high or low.
The BoE’s current approach divides policies. Some former officials have criticized it for locking the central bank into making forecasts that are based on interest rate assumptions that policymakers themselves do not believe.
Others worry that more transparent forecasts of interest rates would be misinterpreted by the public as a commitment rather than a best guess that is likely to change.
Goldman Sachs economists James Moberly and Sven Jari Stehn said it is more likely that Bernanke will heed these concerns and recommend greater use of scenarios.
In 2013 the BoE rejected proposals from an external review that recommended members of its Monetary Policy Committee publish individual growth and inflation forecasts, similar to dot plots.
Bernanke is also likely to take a closer look at the nuts and bolts of the BoE’s forecasting processes – which a parliamentary committee last year heard depended on “inadequate” models that are not suited to dealing with very high inflation.
Catherine Mann, a current BoE policymaker, has criticized how some models effectively rule out the possibility that inflation can get stuck at a persistently high level.
(Reporting by David Milliken; Editing by Paul Simao)