The Bank of England named former US Federal Reserve Chairman Ben Bernanke to lead a review into its economic forecasting, a move that appeared designed to defuse criticism that the UK central bank acted too slowly to contain inflation.
(Bloomberg) — The Bank of England named former US Federal Reserve Chairman Ben Bernanke to lead a review into its economic forecasting, a move that appeared designed to defuse criticism that the UK central bank acted too slowly to contain inflation.
Bernanke, described by colleagues as a “preeminent economist,” led the US central bank through the global financial crisis until 2014 and will support an external probe into the BOE’s forecasting approach and monetary policy making, the BOE said in a statement Friday.
“The review will allow us to take a step back and reflect on where our processes need to adapt to a world in which we increasingly face significant uncertainty,” BOE Governor Andrew Bailey said in a statement.
Sanjay Raja, chief UK economist at Deutsche Bank, said Bernanke’s appointment was “big news.” “Bernanke is a well-known economist with a very strong economics pedigree, combing both a rich central banking background and a strong tenure in academia,” he said.
Read more: BOE Agrees to an External Review of Its UK Forecasting Errors
The Nobel Prize-winning economist would have a “deep understanding” of the workings and defects of the so-called large-scale general equilibrium models used by the BOE, which combine theory with real data to predict the impact of shocks on the economy, Raja added.
Bernanke was slow to recognize the significance of the strains in the sub-prime mortgage market, telling lawmakers in 2007 that the problems were “likely to be contained.” But once the crisis metastasized, Bernanke is credited for acting decisively and creatively to prevent it from getting far worse, drawing on his academic work into the mistakes the Fed made during the Great Depression.
Bernanke’s appointment comes after the Bank of England faced criticism from politicians and economists for failing to predict the sharp increase in the rate of inflation. The UK’s cost of living soared as much as 11.1% last year after the end of pandemic lockdowns, the war in Ukraine and worker shortages led to widespread jumps in wages and prices.
While some of those pressures have subsided, Britain still has the worst inflation problem in the Group of Seven, and members of the ruling Conservative Party have faulted Bailey for letting prices soar.
The BOE became the target of further reproval after it predicted in November that Britain would have to endure the longest recession in modern history to get inflation under control — a forecast which has so far proven incorrect.
Former Business Secretary Jacob Rees Mogg accused the BOE of “bungling” its job last month, after a survey from the central bank showed one-third of Britons were dissatisfied with its performance.
Now, as inflation finally shows some signs of falling back, Chancellor Jeremy Hunt’s own advisers are worrying that the Bank risks raising interest rates too far and pushing the UK into an unnecessary recession.
Officials at the Bank will be hoping that a review by heavyweight academic Bernanke will help put that criticism to bed.
“Ben is a preeminent economist and is unchallenged as a theorist and monetary policy-maker,” said Jagjit Chadha, director of the National Institute of Economic and Social Research. “It’s hard to think of someone who would be in a better position to look at the Bank’s forecasting record.”
But Chadha noted he still had some reservations about the review — namely whether it would be focused enough to produce any meaningful insights, and whether US-based Bernanke’s knowledge about the intricacies of the UK economy was detailed enough.
Yael Selfin, chief economist at KPMG UK, said Bernanke was an “excellent choice” to lead the review, and that his US background might even put him “in a better place to objectively evaluate BOE’s experience.”
“You would normally want someone to lead the review who’s close enough to the current practice to act as an expert, but far enough to prevent a risk of groupthink.”
Bernanke said in the BOE’s statement that “forecasts are an important tool for central banks to assess the economic outlook.” But he added that “it is right to review the design and use of forecasts and their role in policymaking, in light of major economic shocks.”
David Roberts, chair of the BOE court of directors, said it’s “crucial that the bank continuously learns and adapts.”
- BOE Agrees to an External Review of Its UK Forecasting Errors
- Public Confidence in BOE at Record Low as Inflation Woes Persist
- Treasury Advisers Worry BOE Risks Overdoing Inflation Battle
- UK Inflation Falls Below 8% in Breakthrough Against Price Spiral
–With assistance from Andrew Atkinson.
(Adds background on Bernanke in sixth paragraph.)
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