Swati Dhingra, an external member of the Bank of England’s Monetary Policy Committee, admitted to “persistent and systematic” errors in the bank’s inflation forecasts during a conference at King’s College London.
This event followed a review by former Federal Reserve chair Ben Bernanke into the bank’s forecasting inaccuracies.
At the time, inflation had soared to 11.1% in October 2022, prompting the bank to raise interest rates to the highest levels in 16 years. Despite Dhingra’s vote for lowering interest rates from 5.25% to 5%, the rates were ultimately maintained.
Dhingra explained that statistical models inherently possess uncertainties and might often mispredict economic turning points. She commented on the inaccuracy and inevitable errors in even the most sophisticated forecasting models.
Her remarks were underscored by the Bank of England’s chief economist, Huw Pill, who emphasized the importance of achieving sustainable inflation targets. He cautioned against being overly optimistic about preliminary data indicating a slowdown in inflation. This came shortly after Governor Andrew Bailey suggested that interest rate reductions were forthcoming and could occur sooner than expected by financial markets.
These developments occurred as the UK reported unexpectedly strong economic growth early in the year, signaling an exit from recession. Meanwhile, market traders are speculating a 60% likelihood of a rate cut by June, following a drop in inflation to 3.2% and adjustments in the energy price cap, which Governor Bailey believes may have already brought inflation close to the bank’s 2% target.
