LONDON — The on Friday announced a "once in a generation" overhaul of its inflation forecasting following a long-awaited review by former Chair Ben Bernanke.
The review — initiated after criticism of the central bank's policymaking amid spiraling inflation — sets out 12 recommendations which BOE Governor Andrew Bailey said the bank was committed to implementing.
Bailey told CNBC it had been "invaluable" to compare and contrast the U.S. policy perspective with its own.
"This is a once in a generation opportunity to update our forecasting, and ensure it is fit for our more uncertain world," Bailey said.
Bernanke's recommendations are organized into three key areas: improving the bank's forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC) and better communicating economic risks to the public.
The provisions include scrapping the bank's long-held "fan chart" forecasting system and introducing a revamped forecast framework.
The fan chart — which shows a range of possible future data points — has long been used by the bank to present the probability distribution that forms the basis of its inflation forecasts. The model has faced heavy criticism over recent years for failing to accurately keep track of inflationary pressures, and the review concluded that fan charts had "outlived their usefulness" and "should be eliminated."
Bernanke stopped short of recommending Fed-style "dot plot" forecasting, which was introduced in the U.S. after the global financial crisis to allow each member to chart their course of policy stance, inflation, real GDP and employment. But he suggested a new model which better reflects the differing views of committee members and how inflation expectations can become "de-anchored."
He also noted that the BOE currently relies more heavily on a central forecast than do other central banks, and said that its analysis should be supplemented with a wider range of alternative scenarios that "help the public better understand the reasons for the policy choice." Such scenarios may include the effects of different policy choices, or unexpected global shocks.
The suggestion came as part of a wider set of recommendations on how the bank can improve its communications with the public, simplify its policy statement and reduce repetitiveness. The review also said that the bank should move ahead with the current modernization of the software it uses to manage and manipulate data as a "high priority."
The Bernanke review was launched last summer to assess the bank's struggles to accurately project the huge global spike in inflation after .
The bank was widely criticized for being too slow to hike interest rates, meaning it subsequently had to raise its main bank rate to a 15-year high of 5.25%.
With inflation now falling faster than the MPC had anticipated, some economists have contended that the bank is committing the same mistake in the opposite direction, by cutting rates too slowly.
Bernanke added that his role chairing the Fed during the global financial crisis highlighted the critical role of monetary policy on the real economy, but added that the review made "no judgment" of the BOE's recent decision-making.
"The effects of the financial sector on the economy go beyond interest rates. Credibility is important. Risk-taking is important," he told CNBC.
He also said that the difficulties in forecasting were not unique to the BOE, but added that he hoped the bank would draw appropriate lessons from the experience.
The review recommended that the bank take a phased approach to implementing the new measures, starting with improving its forecasting infrastructure. It should then "cautiously" move on to adopting changes to its policymaking and communications, it said.
Incoming BOE Deputy Governor Clare Lombardelli has been charged with leading the implementation of these recommendations when she takes her seat in July. The bank said it will provide an update on the proposed changes by the end of the year.
— CNBC's Elliott Smith contributed to this article.
