MNI INTERVIEW: BOE Central Scenario Should Stress Uncertainty
The Bank of England should retain a fan chart around any new central scenario this week to effectively communicate uncertainty, former BOE economist and Oxford University economics professor Michael McMahon told MNI.
"Some audiences ... the general public in particular, often have way too narrow a view about the uncertainty surrounding … a central bank forecast or just any outlook for the economy," McMahon said in an interview, after co-authoring a recent Bank working paper on central bank communications.
The Bank's July decision, widely expected to keep policy on hold, will be accompanied by the first scenarios since April, when in response to energy price volatility generated by the Iran war a specific central projection was omitted for the only time since Covid. Many expect the Bank to restore such a benchmark alongside scenarios in this monetary policy meeting, despite the continuing unpredictability of energy flows through the Persian Gulf, and McMahon said it should still stress uncertainty.
"My preference is that most of the time, we have something that looks like a central case, and some uncertainty around that," in order to provide a benchmark, he said. (See MNI INTERVIEW: BOE Needs MPC Central Forecast In July - Aikman)
"If they suddenly come out with one in [July] then actually that's telling us that there's a little bit more certainty about how the world will operate … They may well come to the decision that actually just having scenarios is how they want to go forward.”
RETURN TO BENCHMARK
On Thursday the BOE is expected to hold Bank Rate at 3.75%, where it has been since December, even as Catherine Mann may join regular dissenters Huw Pill and Megan Greene in voting for a hike. Chief Economist Pill has expressed concern about second-round effects, and has also said the shift away from central scenarios made it harder for the Committee to reach a collective view.
The 2024 Bernanke review recommended replacing the Bank's fan charts with different scenarios, and Monetary Policy Reports have included these since December.
"I think conditional communication, in the kind of scenario sense, is slightly harder for the general public to understand than just the fan chart or … some kind of uncertainty measure," McMahon said. and (See MNI: BOE Needs More Varied Scenarios - Bean, McMahon)
EXERCISE WITH SCENARIOS
The Bank published a blog comparing the spread between the three scenarios in its April MPR, which modelled how different paths for global energy prices and possible second-round effects could affect the UK economy, with firms' responses to its Decision Maker Panel survey.
McMahon emphasised that he was in favour of the type of exercise from the Bank blog, although selecting scenarios does require judgement. "It is a useful cross check." (See MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored)
"At some point, there is a researcher or policy maker decision, which is which scenarios are we going to put in, and that will determine ... their relative weight in making up that overall distribution,” he said.
"You could design your scenarios so that you have three scenarios that really closely fit that overall distribution," he said, while "the risk with this exercise is that the people answering the DMP did not have the same scenarios in their head."
