Bank of England unlikely to publish interest rate forecasts

The Bank of England is unlikely to publish interest rate forecasts from its nine-strong monetary policy committee (MPC) as part of the biggest overhaul of the central bank’s operations in over 25 years, a senior official has said.
Clare Lombardelli, a deputy governor of the Bank, said the MPC’s “credibility” could be undermined by providing too much certainty about rate-setters’ views on future monetary policy with the publication of interest rate forecasts, a practice known in the US as a “dot plot”.
“This is a highly consequential issue,” Lombardelli said in a speech on Monday. “This is not as simple as it sounds. Publishing a form of expected path risks suggesting greater certainty about future rates than it is possible to give, which in turn undermines policy credibility.”
Lombardelli is in charge of implementing reforms suggested by Ben Bernanke, former chairman of the US Federal Reserve, who laid out 12 recommendations to overhaul the Bank’s practices and modelling, following the UK’s worst period of inflation since the early 1980s.
Lombardelli, who rejoined the Bank this year, said the reforms would take up to five years to implement and represent a “whole nose-to-tail process” on changing how interest rates are set by the committee and communicated to the public.
“This will be the largest reform since the Bank was granted operational independence for monetary policy in 1997,” she said. “We will cover all, but not be limited to, the areas considered in Dr Bernanke’s review.”
A key part of the revamp will be the eventual publication of various scenarios for the future of the economy for the MPC to consider and a reduced emphasis on the committee’s central forecast for growth and inflation. This month the Bank began introducing some of these changes by publishing three “cases” on where inflation may be heading in the coming year.
Lombardelli said the MPC’s scenarios would represent “different stories about the economy” and allow the Bank to take account of the heightened uncertainty that exists in a world where energy and food supply shocks, trade barriers and geopolitical turmoil have hit growth and prices in recent years.
The Bank has come under fire since late 2021 for being too slow to raise interest rates in the face of a historic energy price shock that pushed inflation to a peak of 11.1 per cent two years ago. The MPC is now gradually loosening monetary policy and has carried out two rate cuts this year, warning that it will cut interest rates only incrementally to prevent any upsurge in inflation. Consumer price inflation rose to 2.3 per cent last month.
The Bank will also begin revamping its modelling process, developing more models with a greater range of data sources. Lombardelli said the Bank had already started making changes to its current central model, known as Compass. It will also begin hiring more staff after Bernanke warned of a lack of experience and expertise in the monetary policy department.
Lombardelli, who voted with the majority to cut interest rates to 4.75 per cent this month, said there was still a danger that inflation would not return to the 2 per cent target over the medium term. She warned that wage growth, currently running over 4.5 per cent, would need to return to around 3 per cent to be in line with the broader inflation target.
“The more persistent components of inflation and uncertainties around how the labour market will evolve are cause for concern,” she said. “We need careful observation of all the relevant economic data and intelligence as we seek to gradually reduce policy restriction.”