Bank of England

Bank of England Forecasting: Missing the Mark?

The Bank of England’s Errors

Over the past few years, the Bank of England have made many blunders when it comes to forecasting inflation and raising interest rates accordingly. Whether it be due to unforeseen circumstances, or outright sloppiness, the Bank of England have been getting it wrong.

In November 2021, Bank of England governor said that inflation would only be temporary. The Bank of England decided to keep interests shockingly low, at only 0.1%, believing the forecast of only temporary inflation to be true.

Many were shocked that they did this rather than increasing borrowing costs to combat inflation. However interest rates ended up tripling even before the Ukraine war to 6.2%. The UK Cost of Living crisis is still ongoing 3 years later.

Although they could not foresee the Ukrainian war, the BoE both underestimated and overestimated interest rates during their subsequent forecasts. The sudden global energy crisis caused their February 2022 forecast of 7% to rise to nearly 9%. Then they overestimated the consequence of the energy crisis in August 2022. Their interest rate prediction was nearly 2% higher than reality.

Image Belongs to Copyright Holder: From Institute for Government

Why?

There are several key reasons behind these recent unaccountable predictions:

  1. Failure to Anticipate Major Shocks- The Bank of England were far too late in anticipating events like COVID-19, the Ukrainian War, supply chain disruptions etc. There forecasts were, as a result, more inaccurate than pre-pandemic times.
  2. Outdated Economic Model- The model the bank uses to determine baseline interest rates. did not fully capture the soar in energy prices due to the Ukraine war. Some say it is in need of ‘revamping’.
  3. Over-reliance on Stale Market Data- Many forecasts relying upon current market data became out of date when they were published.
  4. Excessive Administrative Tasks- Studies found that employees were too busy performing tedious or laborious tasks that slowed the efficiency and competency of predictions.

In summary, the Bank’s forecasting accuracy has declined due to its failure to anticipate major shocks, shortcomings in its core economic model, reliance on outdated market data, and administrative burdens – all of which reviews have recommended the Bank address through significant reforms.

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Cover Image- Investopedia