Bank of England criticized for inflation forecasting errors and lack of transparency around predictive models

The Bank of England has been criticized for failing to predict the surge in inflation over the past 2 years. The author analyzed the BoE's forecasts vs other models, finding it under-predicted inflation in 2021 and over-predicted the peak in late 2022.
Looking at 2008-2023, the BoE's forecasts were the most accurate overall but an international model focusing on global factors was best for the critical 2021-23 period.
The BoE raised interest rates sharply in 2022 based on over-predictions of peak inflation, possibly spurring an unnecessary recession.
The BoE under-predicted inflation after QE in 2009, suggesting issues understanding this policy's impact. An alternative model did better.
The author advocates the BoE be more transparent about its forecasting model and participate in an annual "prediction tournament" vs other models.

theconversation.com

Relevant topic timeline:

8/20/2023

RBNZ’s Karen Silk says the OCR is working

### Summary Reserve Bank Assistant Governor Karen Silk says the Official Cash Rate is working despite sticky core inflation and record high employment. ### Facts - 📈 Headline inflation has been falling for the past year, but non-tradable inflation has not declined significantly. - 📉 Core inflation has been stuck at 5.8% for the past three quarters. - 🏠 The average mortgage rate is steadily climbing towards 6%. - 📊 There are signs that the OCR is working to restore balance in the economy, such as falling forward orders for business and decreasing durable spending. - 💰 Demand for residential mortgages has fallen 32.9% in the six months ended March. - 📈 The Reserve Bank expects non-tradable inflation to be lower in the coming quarter on an annual basis, but the quarterly rate may still be high. - ⛽ Higher petrol prices could lead to tradable inflation having its hottest quarter in two decades. - 🎯 The OCR mostly targets domestic, or non-tradable, inflation. - 🎯 The Reserve Bank's forecasts have been criticized for missing its inflation forecast, but Silk defends the forecasts, stating that they are as accurate as any other local economic institution. - 📆 The Reserve Bank has forecasted that headline inflation will be back in the target range one year from now. - 🤔 There is doubt about whether inflation will drop below 3% in September 2024, as predicted. - 💲 Another rate hike may be required to achieve the Reserve Bank's inflation target. - 💱 Some economists believe that the economic downturn could be worse than expected, making a rate hike unlikely in the near future.

9/20/2023

UK Inflation Slows for Third Month, Easing Pressure on Bank of England to Hike Rates

Inflation in Britain slowed for a third consecutive month in August, defying expectations of a rise due to higher fuel prices, with consumer prices rising 6.7 percent compared to the previous year, driven by slower increases in food prices and a decline in hotel room costs. Core inflation also fell more than anticipated, indicating a potential easing of inflationary pressures, though price growth remains uncomfortably high. The Bank of England is set to announce its decision on interest rates, with growing speculation that rates may be held steady due to signs of slowing inflation and a weak economy.

9/20/2023

Fed Forecasting Falters: Interest Rate and Inflation Predictions Miss Mark in 2022

The Federal Reserve's poor forecasting record, evident in its inaccurate projections for interest rate increases and inflation, suggests that investors should not base their investment decisions on the Fed's predictions or any other forecasts.

10/2/2023

BoE Policymaker Mann Sees Need for More Aggressive Rate Hikes to Curb Higher Inflation

Bank of England rate-setter Catherine Mann disagrees with the central bank's forecasts, stating that she believes high inflation will persist, while the bank's forecasts suggest otherwise.

10/16/2023

UK growth forecasts cut for 2024 as higher rates take toll, but 2023 outlook improves

Economists warn that Britain's economy will grow less than expected next year due to the impact of higher interest rates and a weaker labor market, with GDP growth expected to be 0.7% in 2024. However, EY upgraded its GDP growth forecast for 2023 to 0.6%, citing an end to interest rate increases, falling inflation, and a return to real wage growth as factors that should prevent a recession. Inflation is expected to fall faster than previously forecast, reaching 4.5% by the end of the year before hitting the Bank of England's 2% target in the second half of 2024.

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Posted 9/25/2023, 3:47:12 PM

Bank of England criticized for inflation forecasting errors and lack of transparency around predictive models

The Bank of England has been criticized for failing to predict the surge in inflation over the past 2 years. The author analyzed the BoE's forecasts vs other models, finding it under-predicted inflation in 2021 and over-predicted the peak in late 2022.
Looking at 2008-2023, the BoE's forecasts were the most accurate overall but an international model focusing on global factors was best for the critical 2021-23 period.
The BoE raised interest rates sharply in 2022 based on over-predictions of peak inflation, possibly spurring an unnecessary recession.
The BoE under-predicted inflation after QE in 2009, suggesting issues understanding this policy's impact. An alternative model did better.
The author advocates the BoE be more transparent about its forecasting model and participate in an annual "prediction tournament" vs other models.

theconversation.com

Relevant topic timeline:

8/20/2023

RBNZ’s Karen Silk says the OCR is working

9/20/2023

UK Inflation Slows for Third Month, Easing Pressure on Bank of England to Hike Rates

9/20/2023

Fed Forecasting Falters: Interest Rate and Inflation Predictions Miss Mark in 2022

10/2/2023

BoE Policymaker Mann Sees Need for More Aggressive Rate Hikes to Curb Higher Inflation

Bank of England rate-setter Catherine Mann disagrees with the central bank's forecasts, stating that she believes high inflation will persist, while the bank's forecasts suggest otherwise.

10/16/2023

UK growth forecasts cut for 2024 as higher rates take toll, but 2023 outlook improves