BoE: Implementing Bernanke Report Already Underway But Still a Long Way to Go
Without much detail, Deputy Governor for Monetary Policy Lombardelli set out the Bank's plan to implement the Bernanke Review. The details were few and far between, save to say that scenario analysis will be more important and has already been addressed somewhat, with the aim was to help think about the economic channels underpinning the different views across the Committee and consider the policy consequences and risks if the economy were to evolve in different ways. We still think there are shortcomings not being met and we wonder whether what may be long drawn out review may actually handicap actual policy making as the MPC wrestles with an alternative policy outlooks and whether communication may thus suffer.
Figure 1: The Scenario Snapshot
Source; BoE
First, and as seen in Figure 1, Bank staff have already simulated two alternative paths for how the economy may evolve relative to the baseline under different assumptions about the structure of the economy. The two simulations captured features of Case 1 and Case 3 respectively, while the published forecast in the MPR was based on Case 2 and it is notable that this scenario analysis has been quoted extensively by MPC members in the last few weeks.
Regardless, by using the paths for a range of variables implied by those simulations, the intention is to draw what the evidence from the current data suggested about how likely they were. This also involved simulating the monetary policy response each of them implied, using ‘optimal’ policy projections as well as considering the consequences of following the policy path appropriate for one case if in fact it turned out that a different case applied.
Second, the BoE has reconfigured how the MPC will spend its time and what the discussions to focus on. We considered the published forecast alongside the simulations. More Committee time is to be dedicated to discussion about the ways in which the outlook for the economy could be different, how to interpreted the available data, and the implications of that for the path monetary policy should take.
Overall, in making progress in responding to the Bernanke Review, the BoE accepts it has a long way to go as the aim is to undertake an ambitious and necessary transformation in our approach to monetary policy Indeed, and is pointed out, this programme is going to take time to work through – years not months. Some parts will move quicker than others. As Dr Bernanke recommended, some of the most visible aspects of the change programme will probably come towards the end of the process.
But while we at CE regard such an overhaul as being overdue, not least given the manner in which the current fan charts are encompassing near-record assumptions about uncertainty which imply little practical faith in the actual forecast’s accuracies, other issues do not seem to be on the agenda. In particular, we are wary that the BoE is not more formally reconsidering a monetary agenda. Furthermore, the alternative policy perspectives being discussed (such as dot-plots – that now seem unlikely and alternative scenarios) did not prevent the central banks using them (most notably the Fed and Riksbank) from making similar recent forecasting errors to the BoE.