Bank of England launches external investigation into inflation forecasts after criticism of broad forecasts from interest rate setter
- The BoE’s David Roberts tells the Treasury Committee that the bank is turning to outside help
- It has consistently underestimated the pace and ‘stickiness’ of inflation
The Bank of England is seeking external help to review how it forecasts inflation after facing criticism over the past 18 months for failing to accurately estimate price increases.
David Roberts, the presiding judge of the Bank of England, said in a letter from the Treasury Committee that the bank had “decided to undertake a broad review” of its forecasts and “related processes” at a time of “significant uncertainty” .
Roberts told Treasury Committee Chairman Harriett Baldwin MP that the review would be conducted externally, supported by the bank’s Independent Evaluation Office, and that the findings would be “open and transparent”.
Calling in experts: Bank of England seeks outside help to forecast misery
The Bank of England has faced criticism since rising inflationary pressures began to seep into the economy in early 2022.
The bank has consistently underestimated both the pace and ‘stickiness’ of consumer price inflation in the UK, and critics believe it should have started rate hikes earlier and more aggressively.
Roberts wrote to Baldwin in response to a letter expressing “concerns about the bank’s ability to predict inflation.”
She said: ‘I recognize that it is currently doing this in light of some historically large shocks to the economy, but this only adds to the importance of ensuring that forecasts are produced transparently and using best practice.
Given the importance of the inflation forecast as part of the [Monetary Policy Committee’s] processes and communications, I am therefore writing to you to consider instructing the Bank’s Independent Evaluation Office to undertake urgent work to assess the current effectiveness of the Bank’s forecasting platform.”
Speaking to the Treasury Committee last month, BoE chief economist Huw Pill acknowledged the bank’s failure to accurately predict past year’s price increases.
He said: “We recognize that our inflation forecasts have been understated and we are trying to understand why we made those mistakes, interpret those mistakes in terms of the behavior and then make an assessment of whether that behavior will continue in the future.
“Models essentially take averages of past behavior.”
The Bank of England is widely expected to raise interest rates again next week to 4.75%, its 13th successive hike.
Inflation remains stubbornly high at 8.7 percent against a background of rising wages, a tight labor market and meager economic growth.
The Bank still expects inflation to fall to its target of 2 percent by the end of the year
Markets are now pricing in a base interest rate peak of 5.75 percent, but some economists have suggested it could go even higher – and will stay that way for some time to come.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Once the Bank of England chooses to hit pause, no immediate rate cuts are expected.
Inflation is likely to remain a threat, partly due to the ongoing competition for talent in the labor market. Brexit is believed to have made this more acute, particularly for certain sectors, such as healthcare.
“This has had a knock-on effect on another problem facing the economy: the high rate of long-term illness, as a lack of staff is likely to lead to longer waiting times for treatment. With so many people who are too ill to work, the tightness on the labor market is expected to continue.’