Bank of England launches external review into how it forecasts inflation, following criticism

The Bank of England is calling in external help to review how it forecasts inflation, having faced criticism over the last 18 months for failing to accurately estimate price rises.

Bank of England chair of court David Roberts said in a letter published by the Treasury Committee that the bank had ‘decided to commission a broad review’ into its forecasting and ‘related processes’ at times of ‘significant uncertainty’.

Roberts told Treasury Committee chair Harriett Baldwin MP the review would be externally led, supported by the bank’s Independent Evaluation Office, and that its findings would be ‘open and transparent’.

Calling in the experts: Bank of England seeks external help for forecasting woes 

The Bank of England has faced criticism since spiralling inflationary pressures began to enter the economy at the start of 2022.

The bank has consistently underestimated both the pace and ‘stickiness’ of UK consumer price inflation, and critics argue it should have started initiating interest rate hikes earlier and more aggressively.

Roberts was writing to Baldwin in response to a letter in which she cited ‘concerns around the ability of the bank to forecast inflation’.

She said: ‘I acknowledge it currently does so in the face of a number of historically large shocks to the economy, but this only increases the importance of ensuring that the forecasts are produced transparently and using the best possible practice.

‘Given the importance of the inflation forecast as part of the [Monetary Policy Committee’s] processes and communications, I therefore write to ask you to consider commissioning the bank’s Independent Evaluation Office to undertake urgent work assessing the current effectiveness of the Bank’s forecasting platform.’

Speaking to the Treasury Committee last month, the BoE’s chief economist Huw Pill acknowledged the bank’s failure to accurately forecast price rises over the last year.

He said: ‘We recognise that our forecasts of inflation have been too low and we are trying to understand why we have made those errors, interpret those errors in terms of the behaviour and then make an assessment as to whether that behaviour will continue into the future.

‘Models are essentially taking averages of behaviour in the past.’

The Bank of England is widely expected to hike interest rates again next week to 4.75 per cent, marking its 13th consecutive hike.

Inflation remains stubbornly high at 8.7 per cent against a backdrop of rising wages, a tight labour market and meagre economic growth.

The Bank still expects inflation to fall to its 2 per cent target by year-end

Markets are now pricing in a base rate peak of 5.75 per cent, but some economists have suggested it could go even higher – and stay there for some time to come.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘At the point when the Bank of England chooses to press pause, immediate cuts in interest rates aren’t expected.

‘Inflation is still likely to be a threat, partly because of the ongoing fight for talent across the labour market. Brexit is considered to have made this more acute, particularly for certain industries, such as healthcare.

‘This has had a knock-on effect on another problem facing the economy – the high numbers of long-term sick, given that a lack of staff is likely to mean longer waits for treatment. With so many people too sick to work, jobs market tightness is expected to remain.’

This post first appeared on Dailymail.co.uk