A Tough Pill To Swallow

Posted on Nov 27, 2023. by NTI

NTI Newsroom regular Huw Pill, Chief Economist at the Bank of England, has said that the Bank should come up with a new way to model inflation.

The Bank has been criticised by MPs for having failed to predict the extent of the energy price rises and supply-driven inflation in late 2021, and then further increases when Russia invaded Ukraine in 2022.

The Bank currently uses ‘fan charts’ which ‘fan out’ when there are high levels of uncertainty. He said that their present forecasts produce a single projection based on a range of assumptions, and said that this model “has made reliance on a single forecast quite a vulnerable way of approaching [the forecast]”.

In other Bank of England news, Andrew Bailey has said that interest rates will likely have to remain high for a little while yet in order to try and get inflation down to 2%. It is currently said to be 4.6%. He has said “I’m very conscious of the position of the less well-off but we do have to get [inflation] down to 2 per cent and that’s why I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion.”

“By the end of the first quarter next year, when a lot of that [inflation] unwind will have happened, we may be a bit under 4 per cent but we’ll still have 2 per cent to go, maybe.”

Interest rates have been at 5.25% since September, whilst inflation has fallen to its lowest level since October 2021.

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