The Bank of England needs to open its ears, its mind and its wallet, former Federal Reserve Chair Ben Bernanke said today.

Presenting the recommendations from a 10-month review into how the Bank puts together and communicates its economic forecasts, Bernanke said the data tools it used were out of date and unfit for purpose in the modern world, and urged the Bank to make a priority of upgrading them — especially its central forecasting platform, COMPASS.

Bernanke said the Bank had been prone to “papering over” fundamental shortcomings in its modeling by relying more on the judgment of the Monetary Policy Committee, as first the pandemic, then the invasion of Ukraine abruptly ended a period of three decades in which economic forecasting had been relatively straightforward.

The Bank consistently underestimated the impact of those shocks on the economy in the second half of 2021 and the start of 2022, allowing inflation to surge to over 11 percent. The Bank expects it to be still above the medium-term target of 2 percent at the end of this year, by which time it will have overshot for more than three years.

However, as inflation has come down in the last year, the Bank's forecasts have tended to overstate the rate, prompting criticism from some that it is behind the curve on easing policy, just as it was on tightening it.

Bernanke acknowledged that while there had been a “significant deterioration” in the Bank's forecasting since 2020, the same shocks had exposed similar weaknesses in central banks around the world.

“Central banks were dealt a bad hand,” the former Fed chair said at a briefing. “The question is: did they play it well?”

With the global economy seemingly more prone to major shocks than before, Bernanke also urged the Bank to change the way it presents its forecasts, and to downgrade the ‘central projection’ that anchors its quarterly reports on the economic outlook.

Instead, he proposed the Bank model what it thinks should be an appropriate policy path but present a range of alternative scenarios, that would explain how policy could evolve differently if various risks to the outlook materialized.

Alternative scenario modeling, he argued, would also do a better job of communicating the inherent uncertainty in forecasting, as well as providing more timely guidance on which of the assumptions underlying them were right or wrong.

The corollary of this, as expected, was a recommendation that the Bank should abandon the use of so-called ‘fan charts’ in its forecasts, which he said had “outlived their usefulness.”

Bernanke suggested that the forecasting procedure relegates the importance of the market-implied future path of interest rates, which are currently at the heart of the Bank’s regular reports. However, he stopped short of saying the Bank should scrap them, saying this was a longer-term issue.

Governor Andrew Bailey said the Bank is committed to action all 12 of the review's recommendations. However, he pushed back against suggestions that it wasn’t doing enough to modernize its infrastructure, saying that a significant investment program is already underway.

Bernanke said much of the extra investment needed could come from better use of the Bank’s data-savvy researchers. He advised putting them to work in a more focused way on building and maintaining the new forecast models, and suggested the bank do more to promote ‘in role’ those with the relevant capabilities. Historically, the Bank likes to rotate staff through various departments as part of their career development.

Bailey and the rest of the MPC now find themselves in a period of limbo: its existing way of working has been largely discredited, while Bernanke indicated it will take years to develop a new one. Bailey told the briefing that the Bank would report back on what is expected to be a multi-stage restructuring by the end of the year.

This article has been updated.