The Bank of England(BoE) has announced today that Ben Bernanke, who presided over the U.S. Federal Reserve during the global financial crisis, will oversee a review of the institution’s forecasting procedures. The BoE has been under fire from British legislators for failing to foresee the magnitude of last year’s inflation spike, which reached a 41-year high of 11.1%. Last month, the BoE said it would conduct an outside-led assessment to seek modifications.
Bank of England is carrying out inflation forecast review
Consumer prices began to climb quickly in 2021 when economies worldwide recovered from the Covid-19 outbreak. Supply chains were impeded by lockdowns that persisted in significant sectors of the global economy throughout last year while demand for products and services recovered. After Russia’s invasion of Ukraine resulted in a rise in energy prices, prices increased even more, pushing U.K. inflation to a peak of 11.1% in October last year.
Huw Pill, the chief economist at the Bank of England, brought up the matter last month and remarked that forecasting’s biggest problem is figuring out why inflation has persisted after the “unprecedented” foreign inflationary shock caused by the invasion of Ukraine.
The current annual inflation rate in the U.K. is 7.9%, which is stubbornly high and close to four times the BoE’s target. The central bank predicted in May 2021, when prices started to rise that inflation would be roughly 2% in the three months leading up to June of this year.
The U.K.’s central bank has come under fire for its track record of predicting and the quickness of its response to rising prices as families experience the worst real income decline since the 1950s. The BOE has recognized that it has made mistakes since a legislative committee in June requested a review of its forecasting procedure.
Bank of England Gov. Andrew Bailey stated that a review will allow them to step back and deliberate on where their processes require us to adapt to a world in which we face significant uncertainty. The post was “delighted” for Dr. Bernanke, who served as Fed chief from 2006 to 2014. The internal review team at the BoE will assist Bernanke, who was awarded the Nobel Memorial Prize in Economics last year, and he will provide a report in the spring of 2024.
Bank of England has been underestimating inflation
Speaking to legislators last month, Bailey stated that the central bank had anticipated a spike in unemployment in late 2021 once the government began removing the assistance it had provided firms to pay labor costs. Instead, the employment market has become more competitive, and earnings are increasing quickly, raising costs. Frankly, we were mistaken, Bailey said.
Not just the Bank of England is under criticism. Criticism has also been leveled at the European Central Bank and the U.S. Federal Reserve for allowing prices to soar swiftly following the pandemic.
Like other central banks, the BoE reviewed its forecasting methodology during the global financial crisis when it failed to foresee significant economic shifts. Former Fed official David J. Stockton conducted the examination and discovered the BoE’s forecasters had a history of underestimating inflation.
In addition to the Stockton evaluation, the BoE had earlier hired Kevin Warsh, a former Reserve Board member of the Fed, to evaluate its rate-setting committee. His findings suggested that the committee meet less frequently and disclose the proceedings of its meetings earlier.
Meanwhile, three months before the Fed and seven months before the ECB abandoned its negative interest rate policy, the Bank of England hiked its benchmark interest rate for the first time to combat the price spike in December 2021. The U.K. central bank increased interest rates 12 more times after that and is predicted to do so again in August. At the end of 2024, the organization projects that inflation will reach 2%.
