The BoE admits “very important lessons to be learned” about the inability to predict a rise in inflation

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The Bank of England governor admitted there are “very big lessons to be learned” in shaping monetary policy after the central bank failed to forecast the recent rise and persistence of inflation.

Along with other members of the BoE’s Monetary Policy Committee, Andrew Bailey told the House of Commons Treasury Select Committee on Tuesday that the bank’s forecasting model was not providing accurate results and that the committee had reduced its role in setting of interest rates.

“The reason we are not following ‘the pattern’ is because there are asymmetric effects[in the BoE’s view of the path of inflation]. . . We made a conscious decision to aim [the model’s predictions]”, the governor said.

He added inflation it was likely to fall more gradually from the 10.1% rate in March to the BoE’s 2% target than the model predicted.

Instead of using model results, Bailey said BoEThe task now was to think hard about “how we manage monetary policy in the face of very large shocks”. He added: “We have to overcome it and reduce inflation.”

The BoE’s main forecasting model largely assumes that inflation will fall as quickly as it came, and the MPC has increasingly tuned its results to ignore this.

Officials say they now believe wages and prices will continue to rise faster and longer than the model’s central predictions.

While the BoE’s central forecast is for inflation to go down well below 2% in 2025, the MPC believes there is a 50:50 chance it will not fall below the target.

Bailey declined to discuss whether interest rates, which the BoE raised to 4.5% this month, will rise further. “I can’t tell you we’re close to peak or peak, but we’re closer to peak,” she said.

His comments about the difficulties in forecasting inflation came alongside similar remarks from other MPC members, who all vote independently when the committee sets interest rates.

Chief economist Huw Pill said the bank’s economic models failed to cope with recent extreme shocks to energy and food prices because they were based on periods without such shocks.

He added that the MPC could not rely on observations of past episodes of high inflation in the 1970s and 1980s because too many other factors influencing the economy had changed.

Catherine Mann, an outside member of the MPC, said she voted for higher interest rates than a majority on the committee because she expected big rises in inflation to lead to higher wage demands and to encourage companies to try to keep price increases.