Should the Bank of England adopt the Fed's 'dot plots'?

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Central banking is both an art and a science.It involves not only making economic judgments but also communicating them effectively, a job that big central banks have struggled to do well in recent years. Admitting its own imperfect record, the Bank of England last week announced a review of its performance. The OECD forecasts that UK inflation will be the highest in the G7 this year. A recent spate of higher-than-expected wage and inflation data has raised concerns that price growth will remain sticky, while a BoE survey showed public satisfaction at the institution at a record low in May. Like all central banks, the BoE needs to grapple with how it can improve its forecasting processes.

Economic models are based on historical relationships, and their predictive capacity is weakened when unexpected events such as the coronavirus pandemic and the war in Ukraine occur. In fact, many central banks were Russia Mobile Number List too slow to raise rates before inflation hit 40-year highs last year. Ultimately, any model would struggle in times of great uncertainty. This means that it is essential to improve the way central banks convey their forecasts. Here the BoE review can move forward. Transparency is vital. How a central bank communicates its forecast and interest rate decisions influences future rate and inflation expectations, having a real impact on the decisions of households, businesses and investors.



So, if markets trust and understand the central bank's forecasts, the effectiveness of monetary policy improves. However, guiding markets has been a challenge for the BoE, particularly during this rate-hiking cycle. “Consistently. . . has suggested that interest rates may not have to rise as much as markets expect,” said Paul Dales, chief UK economist at Capital Economics. “But then he raised rates more than the markets expected.” Improving your inflation forecast would clearly help. The review should look at why the BoE has consistently underestimated the persistence of inflation and tight labor markets, which has increased price pressures. But the devious way in which the BoE presents its projections makes matters worse.