Bank of England Modernizes Monetary Policy: Bernanke’s Recommendations Implemented

The Bank of England, (BOE), is experiencing sweeping changes in inflation forecasting as a result of the recent review initiated by former Federal Reserve chair, Ben Bernanke. This reconstruction is described by BOE Governor Andrew Bailey as a “once in a generation” opportunity which will help the central bank improve their current mechanism for economic forecasting and, therefore, navigate the complexities of today’s economic environment.

The review, which arose from BOE’s refusal to address the increasing inflationary pressures, was powered by 12 key recommendations that formed the basis of an action plan. These recommendations are classified into three fundamental areas, which include strengthening forecasting infrastructure, enhancing MPC’s decision-making mechanisms and improving risk communication with the government.

At the core of the BOE’s proposal is the drop of the previous “fan chart,” which had been used for many years to depict inflation related outcomes. Hurried for its unsophisticated predicting capacity of inflation, it is set to be substituted by an overhauled forecasting system which is designed to provide more precise depiction of inflationary trends.

While avoiding outright advocacy for the Federal Reserve Board dot plot method, Bernanke does underscore the importance of taking a broader range of perspectives into account. The intention of this change is to enable deviating views among MPC members and avoid the risk of inflation expectations being “de-anchored”. Other than adapting its forecasting strategies, the newly added mandate of BOE would be to upgrade its communications strategies and to create a better sense of understanding among the people regarding the policy decisions of BOE.

All the recommendations will be executed by the incoming BOC Deputy Governor Clare Lombardelli who will take office next July. BOE intends to progress phased implementation of the reforms to gradually prefer its forecasting system upgrade before engaging in adjustments of the policymaking and communication policies. By the year’s end, the BOE aims to ensure that all stakeholders are well informed about the implementation status of these plans through a detailed report, which will underline the central bank’s determination to adopt a more flexible and future-oriented stance in its monetary policy-making.