Bernan Reson urges Bank of England to provide clearer guidance on interest rate paths

(Bloomberg) - Ben Bernanke called on the Bank of England to consider publishing its own outlook for U.K. interest rates to improve the central bank's forecasts and communication with investors and the public.

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The former Fed chief said that if market rates or no-change policies are confusing the BoE's messaging, then the BoE should publish a scenario report on the best way to achieve the 2% inflation target. In an 86-page trial report, Dr. Bernanke made 12 recommendations for the way the Bank of England should publish its economic outlook.

He added that the Bank of England's forecasts need to be upgraded urgently, and that the fan charts that have been at the heart of its decision-making for more than two decades should be scrapped. He emphasized that policymakers should be "extraordinarily clear" where they believe that market expectations of borrowing cost rates are "inconsistent with their view of the outlook".

The nine-month investigation was launched after MPs from across the political spectrum and independent economists criticized the Bank of England for being slow to respond to the worst inflation in four decades.

Dr. Bernan Reson said that the Bank of England can learn from this, but he believes that the Bank's forecasts are no worse than those of other major central banks or private sector economists. He said that while the BoE's forecasts had "indeed deteriorated significantly", its recent challenges were "not unique".

The report was welcomed by Bank of England governor Andrew Bailey, who said he would overhaul the Bank's practices "once in a generation". He said officials were "committed to taking action" to implement all 12 recommendations made by Bernan Reson, but that it would take time and further consultation to develop a detailed plan.

The Bank of England has said it will provide an update on what changes will be made by the end of this year, with resonance Clare Lombardelli, who joined the Bank in July as deputy governor for monetary policy, leading the response. The changes will be made gradually.

Bernanke did not suggest that the nine members of the MPC chart their forecasts for interest rates, as Fed rate-setters do through the "dot plot" forecasts he introduced at the Bank of America.

"I don't think the right model is the Fed's dot plot," he said, "because the Fed doesn't consult with its staff and policymakers the way the Bank of England does." On the contrary, if the central bank to develop towards this party, the better model may be the central bank of Sweden, Norway, Canada, New Zealand and other countries.

However, he said that the BoE should publish alternative scenarios alongside the central forecast and the BoE has vowed to act on this suggestion." He said, "Alternative scenarios would help the public better understand the reasons for policy choices.

"One of the things that needs to be considered in the long run is making your own forecasts of interest rates," Bernan resonance told reporters at a briefing before the release of the examination report. Using the practice where it has been used too often would "lead to a blurring of the interpretation of what the committee is trying to say."

He rejected the notion that the market would take any interest rate roadmap announced by a bank as a cast-iron commitment." While the evidence suggests that financial markets listen to and pay attention to interest rate forecasts, they certainly don't take them as promises or absolute certainty. We learned that from the Fed," he said.

He said that, in addition to using market interest rate paths for central forecasting, the Bank of England should publish at least one alternative policy scenario and one or two possible risk scenarios. These could be used to indicate what the MPC considers to be the most likely interest rate path. The Bank of England has indicated that it will study this proposal.

The proposal appears to be similar to the way the Riksbank operates. The Riksbank publishes a core forecast for the economy, supplemented by alternative scenarios that chart the course of policy in the event of weaker or stronger inflation.

Parts of the Trial Inquiry report were critical of the Bank of England's economic modeling, infrastructure and communications. The software and models used for forecasting were "outdated" and "not adequately maintained". He said that "ad hoc tinkering" had led to a bloated and inactive system, limiting the ability of staff to carry out useful analysis.

Bernanke suggested that the Bank of England replace or overhaul the economic models that underpin its forecasts. This would require a "significant increase in staff time and resources". As part of a £30 million investment in software and systems, promotions are underway, Bailey said.

The former Fed matron said the fan charts - which show a range of possibilities around his central forecast - should be "scrapped" because they "convey very little useful information".

Inflation has halved since the start of the trial in July last year, from 6.8% to 3.4% in the latest data for February, and the Bank of England expects inflation to fall below the target of 2% in the April data, but it remains cautious about declaring an inflation victory due to the huge potential pressures and rapid wage growth.

Several rate-setters at the Bank of England have expressed skepticism about adopting a Fed-style dot plot in the United Kingdom. Bailey said he was "of two minds" about the dot plot, while external rate-setter Catherine Mann said the BoE does a better job than the dot plot by disclosing the results of individual votes 竝 following up with obituaries and interviews. Megan Greene, another external policymaker, cautioned that the market "doesn't understand the intent of the dot plot".

(Updated Birnam resonance quotes and details)

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