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Central bankers across the world are reconsidering their approach to economic forecasts after their striking failures in surveying the latest wave of inflation, while officials call for greater frankness with markets about the uncertainties they face, the Financial Times said in a report published today. Thursday.
I failed European Central Bank AndUS Federal Reserve The Bank of England and other official forecasters, according to the newspaper, are working to determine how the end of the Corona pandemic closures, and the energy shock resulting from the war in Ukraine, could pave the way for the worst inflationary wave in a generation.
The newspaper pointed out that central banks are engaged in extensive analysis of the situation to uncover the reasons for their failure to curb… InflationAfter responding with a significant increase in rates Benefit More than once.
Learning from mistakes
For her part, European Central Bank President Christine Lagarde told the British newspaper earlier that the central bank needs to learn from its mistakes, and said that what must be learned is that there is no possibility of adopting traditional recipes, calling for thinking with a broader horizon.
As a result, officials say one result is an increased focus on alternative scenarios for future economic developments, to show how reactions might be in the context of monetary policy management.
Bank of England chief economist Hugh Bell told the newspaper that this may be a better way to communicate with markets than forecasts issued in the form of traditional charts.
Different scenarios
For her part, Deputy Governor of the Bank of England, Sarah Breeden, said – in a speech she delivered on December 19 – that looking at different scenarios is a useful political tool to confront unprecedented shocks.
The ECB now sets different inflation scenarios, producing a range of response analyzes in cases such as wages rising faster or slower than expected or another shock to energy supplies.
But the bank’s initial attempts to develop these scenarios led to mixed results, and even the “severe scenario” it published in March 2022, which modeled the impact of significant cuts in Russian gas supplies to Europe, underestimated the extent of the rise in the euro zone inflation rate.
He expected average inflation to reach 7.1% in 2022 and 2.7% in 2023, but it rose last year in the European bloc by 8.4%, and it is expected to jump this year by 5.4%.
The Bank of England’s board commissioned former Fed Chairman Ben Bernanke to conduct a review to test the bank’s forecasts and communications, and officials believe greater use of scenario analysis will be among the options examined as part of the review, which is scheduled to report in 2024.
Former Bank of England policymaker Charles Goodhart said that central banks focusing on scenario analysis more than central forecasts would be desirable.
An analysis published by the European Central Bank earlier this year found that incorrect assumptions about energy prices accounted for three quarters of total inflation forecast errors in 2021, when its forecast for the first quarter of 2022 turned out to be too low by 2 percentage points.
In another change, the European Central Bank is closely tracking hundreds of fiscal policy shifts, such as numerous government energy and food subsidies, in order to better control their growing impact on inflation. In addition, its staff is using a wage tracking tool they developed and the results of consumer and business surveys. To adjust the outputs of their models.
But Lagarde said that although this work would be useful, it would not solve all the problems, as she believed a broader horizon was needed, adding that many members of the European Central Bank’s Governing Council still viewed their forecasts with suspicion.
