BOE’s Pill Questions Prominence of Forecasts in Era of Shocks

Huw Pill Photo by Graeme Sloan /Photographer: Graeme Sloan/Bloom

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(Bloomberg) — A combination of increasingly frequent economic shocks and unreliable data has made Bank of England forecasts less useful and the job of UK central bankers particularly “challenging” at the moment, Bank of England Chief Economist Huw Pill said.

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In a speech at a conference in Austria, Pill argued that the effect on inflation of the series of jolts since the 2008 financial crisis has become far harder to judge because the impact is no longer just on demand but now also on the supply potential of the economy. 

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As a result, inflation has become less predictable than during the pre-financial crisis period known as the Great Moderation. In addition, indicators of future inflation have become less reliable — in part due to recent data quality problems at the Office for National Statistics.

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To reflect the more volatile environment, Pill said the BOE needs to “think about how to evolve our communication” to reflect the greater volatility around the central forecast. “There may be reasons to think about making inflation forecasts less prominent,” he said.

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“A monetary policy framework that placed a policymaker-owned inflation forecast at its heart naturally comes under challenge when forecasting inflation gets more difficult.”

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Unlike hits to demand, to which monetary policymakers can respond by cutting interest rates, supply shocks force “trade-offs,” Pill said. A slower economic speed limit means even poor growth can be inflationary, forcing the BOE to respond by raising rates.

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Since the financial crisis, there have been a series of supply shocks, Pill said. Those include the collapse in productivity, Brexit, the pandemic, the Ukraine war and energy shock and most recently US President Donald Trump’s global tariffs. “In the face of these big tectonic shifts, we need to show some flexibility and agility,” Pill said.

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Data issues have forced the BOE to focus more on “late-cycle” indicators, which creates a “trade-off between more reliability in the indicators and their forward-looking character,” he said, adding that the bank needs to think about how best to “evolve our communication” to recognize volatility.

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In a speech earlier this week, Pill argued that interest rates have been falling too fast as the pace of disinflation in the economy is “stuttering.” A steeper-than-expected rise in inflation reported the following day supported his position. 

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Markets reduced their rate-cut bets and now fully price just one more quarter-point cut this year to 4%. 

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Pill was one of two rate-setters to dissent against the decision to cut rates at the May meeting. A majority on the nine-member Monetary Policy Committee backed a quarter-point reduction to 4.25% with two favoring a half-point easing. 

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