MNI INTERVIEW: BOE Needs MPC Central Forecast In July - Aikman
The Bank of England should publish a central forecast reflecting the views of the Monetary Policy Committee regardless of uncertainty caused by the Iran war, National Institute of Economic and Social Research director David Aikman told MNI.
April’s Monetary Policy Report was only the second in which the BOE did not commit to a central forecast, instead delivering three scenarios conditioned on different paths for energy prices and second-round effects. In its July MPR, Aikman said the BOE would be better off going back to a market-rate-based central projection despite oil price volatility.
"Even though it's flawed, I think the ... current approach of conditioning on the market curve and using that as a signal as to whether the Bank thinks the market curve is kind of roughly right or a little bit too rich in some areas, is quite a good approach," Aikman, a former senior BOE official, said in an interview.
His call echoed comments by Chief Economist Huw Pill, who has said the shift away from central scenarios makes it harder for the Committee to reach a collective view. Aikman noted that a recent speech by another MPC member, Alan Taylor, also stressed that the last time the BOE omitted a central scenario, in May 2020 when the economy was effectively shuttered by Covid, it produced a single “illustrative scenario” instead. (See MNI: BOE Needs More Varied Scenarios - Bean, McMahon)
There is "an implicit desire in [Taylor's] speech to return to a central forecast, which I fully agree is what the MPC should be trying to do," Aikman said, adding that "you need to have a forecast that people can buy into."
Governor Andrew Bailey has previously talked about the Bank moving to a staff-led forecast but Aikman believes this would, on balance, be a mistake.
"Is the forecast an input into the policy process, in which case a staff forecast might work, or is it an output? ... Is it the MPC communicating its view on the outlook through the lens of the forecast? Now, traditionally, it's been both," Aikman said.
The committee should avoid a dynamic where they publish a staff forecast they disagree with, he added, as this would be "potentially misleading."
MARKET RATE PATH DISTORTIONS
While the MPC has traditionally conditioned its central forecast on a market rates curve, this has recently deviated significantly from analysts' expectations, with the former implying markedly more tightening. While Taylor said the Bank's market rates-based forecast "inherits those distortions," Aikman is wary of replacing it. (See MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored)
"Even if there is a set of risk premia in the OIS curve, you can't just ignore them. That is actually something that's affecting what it costs you to get a mortgage ... those risk premia need to be taken into account in the forecast," he said.
Ditching the OIS swap curve would raise additional complications, Aikman added.
"The forecast isn't just conditional on the market curve for interest rates. It's conditional on exchange rates, on equity prices, on every other bit of financial condition you can imagine [and] all of those other prices in the economy are effectively consistent with the market curve,” he said. (See MNI: Calls For BOE To Be Clearer On Financial Conditions)
"As soon as you step away from conditioning on the market curve, you have to work out what you're going to do with all of those other asset prices, because if you told me, 'well, interest rates are actually going to fall over the next three years rather than increase as the market curve has got,' then presumably you'd have a lower value of sterling and you'd have a bigger stock price. So you'd have to endogenously work out a different set of paths, which is not a simple thing to do.”
