UK Lords Committee urges Bank of England to improve forecasts after inflation errors

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LONDON – The Bank of England has faced criticism from the Lords Economic Affairs Committee for its reliance on inaccurate inflation forecasts and its lack of intellectual diversity, which the committee believes has contributed to persistently high inflation rates in the United Kingdom. The committee recognized the role the Bank has played in enhancing economic confidence since its independence in 1998, and called for modest changes to its operational approach.

The Lords Committee noted that while unforeseen events such as the conflict in Ukraine in February 2022 were unexpected, the current high inflation, which exceeded 11% last year, was also the result of monetary policy errors. To address these concerns and improve the accuracy of economic forecasts, the bank brought in Ben Bernanke in July to revamp the forecasting models it uses.

The committee stressed that expanding the bank’s responsibilities, including combating climate change, may have diverted attention from its core tasks of financial stability and inflation management. Lord George Bridges stressed the importance of learning from these mistakes to restore public confidence.

In response to the post-pandemic recovery and global supply chain disruptions exacerbated by geopolitical tensions, particularly the Russian invasion of Ukraine, the bank raised interest rates in December 2021, when UK inflation exceeded 5%. However, expectations of reduced inflation were not met due to continuing supply chain challenges and the end of economic support measures, such as the government’s retrenchment plan.

The bank’s primary goal is to keep inflation near the 2% target through its base interest rate, which has an impact on lending and saving rates across the country. The Lords Economic Affairs Committee suggests that a reassessment of the Bank’s remit by the Treasury may be necessary to ensure its continued focus on this objective.

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