Should we trust the BoE’s inflation forecast?

The Bank of England’s primary role is to keep the rate of inflation at its perceived optimum level of 2%. It does this by adjusting interest rates, specifically, increasing rates should reduce inflation - and vice versa.

But the Bank of England doesn’t just make decisions in a reactionary style after inflation has already changed. The bank has to predict what will happen to jobs, pay and the economy in the future, and then make decisions based on those future projections.

Thus, the central bank’s longer-term forecasts will guide today’s interest rate decisions. And if those forecasts are inaccurate, they could be making the wrong interest rate decisions. So, should we trust the BoE’s predictions?

How accurate are the BoE’s forecasts?

The data tells us that the Bank of England has been underestimating the rate of inflation over the immediate nine-month periods ahead. This means that inflation has been higher than they expected, which has drawn criticism from many MPs and even resulted in changes to the way the central bank will make forecasts going forward.

But what does this mean in practice? If the bank has been underestimating inflation, it probably has not acted quickly enough to combat inflation previously. However, not all the criticism may be justified. Some worldwide events have affected inflation in the UK, which the bank would never have been able to predict, such as the pandemic and Russia’s invasion of Ukraine.

Nevertheless, the former lead at the US central bank, Ben Bernanke, is to spearhead a review of the way the Bank of England makes predictions. The review of processes is hoped to refine forecasting in an uncertain economy and make predictions more accurate to inform better interest rate decisions.

Should we prioritise forecast data at all?

The inaccuracies of Bank of England forecasts can have dire consequences for borrowers, especially those with a mortgage when rates are increased unnecessarily. It’s no surprise then that some have questioned whether the forecasts possible are even a suitable way to inform interest rate decisions.

The Chief Economist at UBS Global Wealth Management, Paul Donovan, has recently stated how forecasts can only tell us so much. Focusing on changes to the energy price cap, he stated that this information can tell us how energy prices should affect inflation on its own, but it’s much more difficult to understand how changes to energy prices affect businesses, including farmers, supermarkets and transport. There is still a lot of uncertainty even within the most carefully considered forecasts.

What is the BoE predicting next?

The Bank of England’s existing predictions, which may not be under further review, suggest that inflation will continue to fall throughout the year. The good news for homeowners with a mortgage is the actual rate of inflation appears to currently be lower than the central bank’s predictions.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

August 2023