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Bank of England Has “Serious Problems” Says US Fed Ben Bernanke – Out of Date Software and Insufficient Resources

Published April 12, 2024 5:07 PM
Shraddha Sharma
Published April 12, 2024 5:07 PM

Key Takeaways

  • The Bank of England has issued outdated software and inadequate forecasting resources, according to a report by Ben Bernanke.
  • Manual processes and old models contribute to inaccurate economic forecasts.
  • Bernanke’s recommendations include major updates to software, model maintenance, and a comprehensive review of forecasting frameworks.

In an assessment led by former US Federal Reserve Chair Ben Bernanke, the Bank of England uses outdated software. The review was initiated in July 2023 due to the Bank’s frequent misestimations during economic volatility. Deutsche Bank calls the revamp a major challenge for the BoE.

Findings in Bank of England Review

The review  spearheaded by Bernanke revealed that the Bank of England relies on outdated software and manual processes where automation should be done. BoE’s “serious problems” include a lack of critical functionalities essential for accurate economic analysis and forecasting. The review finds that the primary economic model “COMPASS” has “significant shortcomings,” which hinder the Bank’s ability to perform economic analyses and generate reliable forecasts.

Bernanke’s findings also reveal a lack of resources dedicated to maintaining and updating the forecasting infrastructure.

Bernanke noted that during economic uncertainty when precise forecasting is most crucial, the Bank’s staff are overly consumed with producing current forecasts which leaves no capacity to improve or maintain essential forecasting tools and models. This has resulted in a reliance on makeshift fixes and an overly complicated system that fails to meet modern analytical needs.

Bernanke’s Recommendations for Modernization

A key recommendation from the report is the urgent modernization of the Bank’s data management and analysis software. Bernanke believes that it will ensure comprehensive, well-defined, and easily accessible economic and financial data. 

To rectify ongoing issues, Bernanke advises that model maintenance and development should become a continuous priority. He recommends regular evaluations and updates to the models.

In the longer term, the review encourages BoE to conduct a thorough overhaul of its forecasting framework. BoE will have to either replace or revamp the existing COMPASS model to include other models.

The goal of these recommendations is to enhance the Monetary Policy Committee’s (MPC) decision-making process by providing more reliable economic forecasts.

The review notes, “The specific framework and models to employ should be decided over a period of time by the staff with MPC input. However, so that staff can respond to policymakers’ requests for new analyses in a timely way, flexibility, transparency, and ease of use (including automation of processes now carried out manually) should be important criteria for a restructured system.”

Revamp Will be Challenging

The recommendations involve moving away from the current practices, Sanjay Raja, Chief UK Economist at Deutsche Bank Research believes the revamp is challenging. He noted, “More work will be needed to get the Bank’s forecasting infrastructure up to par, and some tweaks to the MPC’s communications will be coming in to improve transparency on policy decisions going forward.”

Raja added, “The biggest challenge from the Bernanke Review will be the fundamental revamp of the Bank’s forecasting framework, with Bernanke being highly critical of the Bank’s key software and forecasting functionality.”

He noted that addressing these issues will be a primary task for the incoming Deputy Governor, Clare Lombardelli. The British economist is set  to begin her tenure on July 1, 2024.

Overall, Raja believes that the Bernanke Review does not dramatically change how the Bank of England conducts policy in the short term. He said, ” Any external changes will be gradual, with bigger changes likely to take place behind the scene.”

Conservative Member of Parliament David Davis criticized  the BoE for its failure to accept responsibility for its inaccurate inflation predictions. He also pulled up the Bank for a notable absence of accountability.

BoE Might Make Gradual Changes

The comprehensive review notes the outdated and under-resourced economic forecasting methods used by the Bank of England. Research economist with Deutsche Bank notes that the incorporation of the detailed recommendations will be gradual.

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