Bank of England scraps outdated inflation forecasting model in major overhaul after Fed boss’ review

LONDON — The Bank of England on Friday announced a “once in a generation” overhaul of its inflation forecasting following a long-awaited review by former Federal Reserve Chair Ben Bernanke.

The review — initiated following criticism of the central bank’s recent policymaking — sets out 12 recommendations which BoE Governor Andrew Bailey said the bank was committed to implementing.

Bailey told CNBC it had been “invaluable” to compare and contrast the U.S. policy perspective with its own.

“This is a once in a generation opportunity to update our forecasting, and ensure it is fit for our more uncertain world,” Bailey said.

Bernanke’s recommendations are organized into three key areas: improving the Bank’s forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC), and better communicating economic risks to the public.

They include scrapping the Bank’s long-held “fan chart” forecasting system and introducing a revamped forecast framework.

The fan chart — which shows a range of possible future data points — has long been used by the Bank to present the probability distribution that forms the basis of its inflation forecasts. However, the model has faced heavy criticism over recent years for failing to accurately keep track of inflationary pressures, and the review concluded that fan charts had “outlived their usefulness” and “should be eliminated.”

It recommended instead that the BOE use a new model that better reflects the differing views of committee members and how inflation expectations can become “de-anchored.” It added that the BOE currently relies more heavily than other central banks on a central forecast, which may not fully account for wider risks, and said that it should supplement that with wider range of alternative scenarios.

Additionally, the review said the bank needed to improve its communication with the public, suggesting that it put less emphasis on the central forecast, simplify its policy statement, and reduce repetitiveness. It also said that the current modernization of software used to manage and manipulate data was a “high priority.”