The report by David Stockton, a former Federal Reserve official, sets out options including encouraging “more assertive” staff to challenge the central bank’s “house view” and incorporating financial-stability risks into forecasts. It said the latter should be “high on the agenda.”
The Bank of England stands in London. Photographer: Simon Dawson/Bloomberg
The review is one of three commissioned by the central bank’s governing body following a lawmaker push for an inquiry as the BOE prepares to take on unprecedented powers to regulate the financial system. The bank also released reports on its framework for providing liquidity to the financial system and its emergency support to banks.
“The Monetary Policy Committee’s recent forecast performance has been noticeably worse than prior to the crisis, and marginally worse than that of outside forecasters,” Stockton said. “The bank and the MPC need to introspect more deeply and more systematically about the lessons that can be gleaned from episodes of large forecast errors.”
Bank of England Governor Mervyn King and deputy governors Charles Bean and Paul Tuckersaid in a statement the reports “have given us a great many ideas to consider that could improve the bank’s performance.” Andrew Tyrie, the head of the Parliamentary committee that scrutinizes the BOE, said the reports are a “step forward,” though he criticized the central bank’s management.
“A comprehensive review should already have taken place,” Tyrie said. “The fact that it took so long to obtain even these reports illustrates the bank’s defective governance.”
Too Optimistic
The MPC’s projections for growth and inflation were too optimistic, Stockton said. The explanations for the errors, such as underestimates for the inflationary effect of the depreciation of sterling, or the scale of the squeeze in credit provision, are “persuasive,” he said. Still, the “serial persistence” of errors needs fuller analysis.
“That persistence could simply reflect a string of bad luck, but it also could reflect some inertia imparted by the forecast process or point to problems with the paradigm underlying the bank’s forecasts,” he said. There has been a “lack of systematic, detailed quantitative analysis undertaken by the bank to interrogate its forecast errors.”
New Forecasts
The Bank of England will have new forecasts at its policy meeting next week that it will publish on Nov. 14. The National Institute of Economic and Social Research cut its 2013 U.K. growth forecast today to 1.1 percent from 1.3 percent. The London-based group said the economy will shrink 0.1 percent this year, less than the 0.5 percent expected previously.
U.K. construction unexpectedly expanded in October, according to a report today from Markit Economics. It said its gauge rose to 50.9 from 49.5 in September. In the euro area, a factory index by Markit fell to 45.4 from 46.1, where readings below 50 indicate contraction.
Later today, a U.S. Labor Department report may show the nation’s jobless rate rose to 7.9 percent in October, according to a survey of economists by Bloomberg News. Payrolls grew by 125,000 workers last month following a 114,000 gain, the survey showed. ... Continue to read.
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