Judgement day for Andrew Bailey: When push comes to shove, decision-making is dependent on Bank’s faulty modelling, says ALEX BRUMMER

Test days lie ahead for Andrew Bailey and the Bank of England. Halfway through his eight-year term as central bank governor, his homework is about to be graded.

At the insistence of the Court, the Bank’s supervisory board, former US Federal Reserve Chairman Ben Bernanke, will soon release its report on the Bank’s flawed forecasts and how they can be improved.

No one should expect this to be a joke.

Bernanke is a Nobel Prize-winning economist and there is certainly a lot of technical nonsense out there about forecasting models.

Bailey and the Bank could also soon face yet more arrows from Britain’s political right, with former Prime Minister Liz Truss publicly claiming the Bank is part of a “deep state” that contributed to its demise.

Many criticisms of the Bank’s activities have been well expressed. For far too long, it clung to its belief that the rise in inflation from 2021, which would peak at 11.1 percent at the end of 2022, was a transitional measure.

It took a long time before the danger was recognized – the Bank was not alone among the G7 countries – but Chile, Norway and Brazil took action earlier to avert the danger.

More damaging was the decision to continue printing money through quantitative easing, against the advice of former chief economist Andy Haldane.

The forecasts for both inflation and output were so off that they were risky.

If the predictions had been correct, Britain would be in the midst of the longest recession in history.

There was a short technical recession in the second half of 2023, after interest rates were raised to 5.25 percent.

Most current survey data suggests that, although slow, a recovery is underway, with both manufacturing and construction supporting a booming services sector.

Communication from the top of the Bank was often poor. In the midst of the cost-of-living crisis, Bailey called pay increases “unsustainable.” The well-paid governor suggested that everyone else should be poorer. Haldane’s successor as chief economist, Huw Pill, unsentimentally suggested that people should accept that they would be less prosperous because of the energy price shock. Much more has happened.

As a long-time observer of Bailey in various roles, one of his shortcomings is a tendency, in the interest of openness, to think out loud. This makes him prone to blunders. Colleagues within the Bank have ungraciously reported dropping out during meetings. The “sexy turtle,” as pastor Mark Carney called him, has earned the unkind nickname “Rock-a-bye Bailey,” according to The Economist.

That’s perhaps not surprising, given the several “night-nighters” he implemented as successive shocks hit the economy.

What will Bernanke propose? Chancellor Jeremy Hunt is embracing the idea of ​​AI and technology to accelerate the NHS. The suggestion is that the Bank could do with an IT overhaul, which would allow it to include many more variables in its forecasts.

The current Bank model, known as Compass, has a limited scope and is primarily focused on output.

Many of the variables used come from the era of great stability before the brutal shocks of the past twenty years, such as the great financial crisis, the pandemic and the Russian war against Ukraine.

The other major gap is ‘groupthink’. Most Monetary Policy Committee (MPC) rate-setting insiders have similar backgrounds, with several having worked at or closely with the Treasury Department. The external members tend to have more humor and differing views, especially on the delays – delays in the effectiveness – of monetary policy.

But when push comes to shove, decision-making largely depends on the Bank’s flawed models. Compare this to the US, where the dozens of presidents of the regional Feds have access to their own forecasting units and models, which speak to a different set of wisdom that the Fed incorporates into its projections.

Britain may not lend itself to such an approach. Nevertheless, a more diverse MPC, armed with diverse forecasts and opinions, would greatly improve the credibility and reliability of decisions.