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The Bank of England’s financial stability objective is to protect and enhance the stability of the financial system of the United Kingdom.[1] In relation to this objective, the Court of Directors of the Bank has a statutory responsibility to determine the Bank’s strategy and to review it at least every three years and revise it if necessary.[2]

This latest Financial Stability Strategy was reviewed and revised on 19 April 2023 following consultation, as required by statute, with HM Treasury (HMT).[3] It updates the strategy determined in 2017 and reviewed in 2020.[4] It further encompasses the relevant strategic priorities for the Bank over the period 2021-2024.[5]

Organisation of responsibilities

The Bank is responsible for the delivery of its financial stability objective in line with this strategy.

The Bank has two statutory bodies with responsibilities to make specific contributions to UK financial stability:

  • The Financial Policy Committee (FPC) is responsible for identifying, monitoring, and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC sets macroprudential policy, relating to the stability of the financial system as a whole. In meeting this responsibility, the FPC maintains an overview of the UK’s microprudential regulatory and supervisory frameworks relating to individual financial institutions and any financial stability issues arising in relation to these. Subject to achieving that, the FPC should act in a way that supports the economic policy of the Government. The FPC has specific powers of Direction over two microprudential authorities, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), and the ability to make ‘comply or explain’ Recommendations to both authorities; it has the ability to make Recommendations to any other person, including relevant authorities on action necessary to conserve financial stability.
  • The PRA is the microprudential regulator of banks, building societies, credit unions, designated investment firms and insurers. It must take into account financial stability considerations when advancing its general objective to promote the safety and soundness of the firms it regulates. The PRA also has an objective to protect insurance policyholders and a secondary objective to facilitate effective competition[6]. The PRA’s most important decisions are taken by the Prudential Regulation Committee (PRC) of the Bank. The strategy for delivering its statutory objectives was set by the PRC in consultation with the Bank’s Court of Directors and published in the PRA Business Plan 2022/23.[7]

The Bank has statutory responsibilities in relation to financial market infrastructure (FMI) and resolution:

  • The FMI Board exercises the Bank’s powers in relation to FMIs, and the Bank’s strategy with respect to FMI supervision is set out in an approach document, with updates provided in the Bank of England’s Annual Report on FMI supervision.[8]
  • The Bank is the resolution authority for the United Kingdom and has published its approach to resolution, and to how it assesses UK banks’ resolvability.

The Bank uses its balance sheet, operations, the provision of critical infrastructure (including the RTGS service), and the production and distribution of banknotes to support financial stability.

The Monetary Policy Committee (MPC) has responsibility for formulating monetary policy with an objective to maintain price stability. Price stability reduces the scale of economic fluctuations over time, and so supports financial stability.

The Bank also relies on other UK authorities to meet their responsibilities. For example, HMT determines the regulatory framework for the UK financial system and is able to specify which activities should be regulated and which activities should be prudentially regulated by the PRA. The FCA is the conduct regulator for financial companies and financial markets in the United Kingdom and the prudential regulator for some of those firms, including asset managers, consumer credit providers and insurance brokers. The Pensions Regulator is responsible for regulating and overseeing workplace pensions, ensuring employers meet their legal obligations, and taking action to protect members’ interests.

A Memorandum of Understanding outlines how HMT, the Bank and the PRA will co-ordinate with each other in the run-up to and during the resolution of a firm. As resolution authority, the Bank decides which resolution tools to use and carries out the resolution, except for temporary public ownership and public equity support, for which HMT is responsible. HMT must also authorise the use of any resolution power which would have implications for public funds.

Guiding principles for the Bank’s Financial Stability Strategy

A stable financial system is one that has sufficient resilience to be able to facilitate and supply vital services by financial institutions, markets and market infrastructure to households and businesses, in a manner that absorbs rather than amplifies shocks. Those vital services are:

  • the provision of payment and settlement services;
  • intermediating between savers and borrowers, and channelling savings into investment; and
  • insuring against and dispersing risk.

The Bank protects and enhances the stability of the financial system by:

  • Ensuring the financial system remains resilient;
  • Promoting the safety, soundness and resolvability of firms and the resilience and reliability of financial market infrastructure;
  • Providing secure and reliable payments infrastructure, market operations, banking services and banknotes.

In doing so, the Bank’s approach reflects the fact that:

  • The UK is a leading international financial centre. The UK’s financial services sector and the wider UK economy benefit from that openness and competitiveness. But it also means that the UK is exposed to shocks from abroad. Actions of UK authorities to set standards, and its leadership in setting global standards, contribute to international as well as domestic financial stability. The UK’s institutions and markets must be a source of strength for the global system and able to be relied upon by others. The IMF considers that the stability of the UK financial system is therefore a global public good.[9]
  • Financial stability is not about the elimination of all risks or minimising volatility in the financial system. It is about identifying, monitoring and taking action to remove or reduce systemic risks – those that could severely impair the supply of the financial system’s vital services.
  • The necessary resilience must be delivered efficiently, so as not to hamper the ability of the system to serve the real economy.

The Bank’s approach aims to be in step with the changing needs of the economy, and the changing financial system. It therefore supports improvements to the provision of financial services to the economy by facilitating sustainable innovation in the financial system. This is reflected in the Bank’s strategic priorities[10], which allow the Bank and the financial system to adapt safely to opportunities, and to technological and environmental changes.

The experience of recent years, including the Covid pandemic, Russia’s invasion of Ukraine, and stresses in market-based finance, show more than ever the importance of maintaining confidence in the ability of the financial system as a whole to remain resilient and absorb rather than amplify shocks.

Key elements of the Bank’s Financial Stability Strategy

The strategy has three broad elements:

a: Maintain a robust baseline level of resilience for the UK financial system;

b: Continue to identify risks to the economy that could emerge from the UK or global financial system, and take action where necessary; and

c: Facilitate sustainable innovation in the UK financial system, including to support the changing needs of households and businesses.

a: Maintain a robust baseline level of resilience for the financial system

1. Implement robust prudential regulation in the UK in line with relevant international standards. Going forward, UK financial stability will require levels of resilience at least as great as those put in place since the global financial crisis and required by international baseline standards, and – recognising the importance of the UK as an international financial centre – in some cases greater.

2. Maintain a safe and open regulatory regime. The Bank aims to ensure a fit for purpose UK regulatory regime that underpins a resilient and dynamic international financial sector that is safely open to the rest of the world. Strong standards and a resilient financial system also support the UK’s competitiveness by providing firms, customers and counterparties with reassurance that they can do business here with confidence. Following the UK’s withdrawal from the EU, HM Government is taking action, through the Financial Services and Markets Bill,[11] to ensure that the UK maintains a coherent, agile, and internationally respected approach to financial services regulation that delivers appropriate protections and promotes financial stability.

3. Recognising the importance of the UK as a global financial centre – and working with other UK and international authorities – remain at the forefront of efforts to strengthen international standards where necessary, including for market-based finance. Robust, consistently implemented, standards increase the resilience of the global financial system and ensure a level playing field across jurisdictions — this promotes financial stability, financial openness and efficiency. As host of a global financial centre, the United Kingdom also depends upon other jurisdictions implementing robust standards.

4. Supervise firms to promote their safety and soundness to financial and operational risks (including cyber risk) and in the case of insurers, also to protect insurance policyholders. A forward-looking, judgement-based supervisory approach ensures prompt, corrective actions are taken where needed. Effective co-operation and information sharing with other jurisdictions helps supervisors to gauge and manage risks for global financial firms. Strong supervision of globally important FMIs that are based, or operate, in the UK reduces systemic risks both in the UK and at the global level.

5. Ensure banks’ resilience is used effectively in times of stress. The Bank aims to ensure that banks can draw on their capital and liquidity buffers, as necessary, to allow them to cushion shocks and maintain the provision of financial services to the real economy. Some buffers are intended to be ‘countercyclical’; as risks grow, the buffers will increase. If and when risks crystallise, buffers are made available for banks to draw down so they can absorb shocks without disrupting services.

6. Stand ready to provide liquidity to eligible UK firms to reduce the cost of disruption to critical financial services, particularly during periods of heightened uncertainty or market dysfunction. In some cases, banks’ liquidity buffers may not be sufficient to absorb the full impact of a stress. It would not be realistic or efficient to expect UK banks and other financial intermediaries to self-insure against every conceivable shock. The Bank therefore stands ready to use its existing liquidity toolkit, alongside any future tools that are developed (see para (14) on readying the Bank’s balance sheet policy toolkit for the future), to provide liquidity to eligible counterparties by offering to swap high-quality but less liquid collateral for more liquid assets, with an appropriate haircut on the collateral.[12] The FPC contributes to the Bank’s reviews of its market facilities, by giving views (periodically and in the event of material developments) on whether the facilities remain fit for purpose from a macroprudential perspective.

7. Seek to ensure that banks, insurance companies and central counterparties (CCPs) are set up so they can fail without severe disruption. The Bank maintains readiness to use its resolution powers to manage failures as needed of individual banks, building societies, CCPs and certain investment firms to mitigate severe disruption to the financial system and wider economy. The Bank’s resolution regime ensures that, should they fail, major firms can remain open and operating, with shareholders and investors bearing losses and the costs of recapitalisation. This helps to preserve financial stability as the critical functions of the firm can continue while an orderly restructuring takes place. Resolution therefore aims to reduce risks to depositors, the financial system, and any residual risk to public funds that could arise due to the failure of a firm, and helps to align the incentives of firms’ shareholders and managers with the broader public interest. In addition, HM Treasury has published a Consultation Paper[13] on proposals for an insurer resolution regime that will provide the Bank with new powers and tools to effectively manage the failure of a major insurer. The Financial Services Compensation Scheme protects individual depositors in the event that a PRA authorised bank, building society or credit union’s financial circumstances are such that it is unable to repay deposits, and insurance policyholders in the event that an insurer is unable or likely to be unable to satisfy protected claims against it (in each case subject to certain limits and conditions).

8. Provide the infrastructure for resilient settlement of the most critical high-value sterling payments and key retail payment systems by enabling them to be settled resiliently and in central bank money through the Real Time Gross Settlement (RTGS) service.

9. Continue to ensure appropriate individual accountability in financial services. The Senior Managers and Certification Regime (SM&CR) for banks, insurers and other authorised persons[14] promotes the safety and soundness of regulated financial services firms and financial stability by ensuring responsibilities are clearly understood. The Bank supports the inclusion of a SM&CR for Financial Market Infrastructures (FMIs) measure as part of the Financial Services and Markets Bill, which allows the government to design and put in place a similar regime for CCPs and central security depositories (CSDs), as well as HMT’s consultation on extending the SM&CR to recognised payments entities and potentially a wider range of payments firms.

b: Continue to identify risks to the economy that could emerge from the UK or global financial system, and take action where necessary

10. Identify and communicate vulnerabilities[15] – in market-based finance and the banking system – to economic and other shocks. The Bank identifies potential risks to financial stability and explains them publicly so that the financial system can be prepared and resilience can be built up. Transparency about risks is essential to strengthen resilience and for plans to be put in place to manage those risks should they crystallise. One important element of this work is the stress testing of banks, insurers and CCPs to potential macroeconomic and market shocks, and to other risks that may not be neatly linked to the financial cycle. These tests aim to ensure the banking system and financial intermediaries can continue to supply credit and other services even in a very severe stress. Another key element is the regular reviews the FPC carries out of risks beyond the core banking sector. The FPC further assesses vulnerabilities in both banks and market-based finance on an ongoing basis.

11. Proactively prepare for emerging risks in the system. A forward-looking approach is required in order to identify and take action in a timely way to reduce risks to the stability of the financial system. Reflecting this, the Bank’s ongoing work recognises the increasing importance of non-bank financial institutions (NBFIs) to the UK economy. The Bank will run an exploratory stress scenario exercise to (i) enhance understanding of the risks to and from NBFIs, and the behaviour of NBFIs and banks in stress, including what drives that behaviour; and (ii) to investigate how these behaviours and market dynamics can amplify shocks in markets and potentially bring about risks to UK financial stability. This will provide useful information on how firms manage risks across the system – information useful to both the participating firms and their regulators, as well as the Bank. The Bank is also undertaking work to develop the framework for operational resilience (for example, cyber risks and increased use of critical third parties). The Bank seeks to ensure that it is prepared with the toolkit, frameworks and capabilities to respond effectively to micro, macro, real economy and operational risks to the financial system.

12. Take action to address systemic risks, including to mitigate financial stability risks from very high levels of private sector debt, which can make the system less resilient and economic growth more fragile. The Bank and its committees have a range of tools available to protect and enhance the stability of the financial system. This includes regulatory, supervisory and resolvability measures, and its banking, balance sheet and infrastructure operations. The FPC can use tools where appropriate to prevent and address unsustainable levels of leverage, debt or credit growth in the financial system. It has specific powers of direction over the PRA and FCA, and the ability to make Recommendations to any other persons, including relevant authorities. This includes the power to make Recommendations to HMT to change the regulatory perimeter to deal with risks, if necessary. In using its tools, the Bank seeks to ensure that the resilience of the financial system can adapt and be used effectively.

13. Maintain the Bank’s commitment to mutual international cooperation. This is needed to ensure a safe and strong financial system as it helps identify and address cross-border risks. The Bank participates in international fora for cross-border regulatory issues (such as developing rigorous common international baseline standards) and has a number of Memoranda of Understanding (MoUs) in place with supervisors in other jurisdictions to enable the effective supervision of firms operating across borders.

14. Ready the Bank’s balance sheet policy toolkit for the future so it can respond to evolving market structures. Over recent years, and in response to events such as the global financial crisis, the economic impact of Covid, and severe repricing of gilts in September 2022 that exposed vulnerabilities in liability-driven investment (LDI) funds, the Bank has needed to design and implement new balance sheet policy tools in order to achieve its mission. The monetary policy toolkit has expanded to include additional tools beyond Bank Rate, including the purchase and subsequent sale of financial assets through quantitative easing. The Bank has also made significant changes to its approach to liquidity insurance since 2008, such that it now offers highly liquid assets (either cash or gilts) over longer terms, against a wider range of assets as collateral, and, where possible at lower cost, through a wide range of facilities. And in September 2022, the Bank undertook temporary and targeted purchases in the gilt market on financial stability grounds. These changes mean that the Bank’s balance sheet is currently, and in steady state is likely to remain, larger and more complex than it was before the global financial crisis. The Bank is undertaking a programme of work to examine important questions about how the tools and facilities interact with each other, whether new tools or facilities are needed, which tools should be deployed and which types of firms should be eligible to use them.

c: Facilitate sustainable innovation in the UK financial system, including to support the changing needs of households and businesses

15. Shape and facilitate the future of payments and settlements. New payment technologies are resulting in changes to the way payments are and can be made – a core function of the financial system. The Bank is in the process of renewing its RTGS service, which will deliver enhanced resilience and support competition and innovation in both wholesale and retail payments.[16] The Bank is also separately examining the possibility of a retail Central Bank Digital Currency (CBDC) for the UK.[17] The Bank also intends to consult on its proposed regulatory framework for systemic stablecoin arrangements, and is expected to receive powers over these entities in 2023. The Bank is supporting innovation in settlement through its work with the FCA and HMT to establish a Financial Market Infrastructure (FMI) Sandbox in 2023. The Sandbox will remove existing regulatory barriers to allow industry to experiment using new technologies, such as distributed ledger technology (DLT), to deliver traditional FMI activities such as trading and settlement. Internationally, the Bank is actively participating in global fora which seek to co-operate and co-ordinate in ensuring that payments innovation can take place safely and sustainably, and is actively contributing to enhancing cross-border payments.

16. Respond to the challenge of climate change, ensuring that the financial system is resilient to climate-related financial risks and supportive of an orderly economy-wide transition to net zero emissions. Following the 2021 Climate Biennial Exploratory Scenario (CBES)[18], the Bank will continue to work with banks and insurers to improve climate risk management, for example, by disseminating best practice and considering how the financial risks from climate change are reflected in the micro- and macro-prudential capital frameworks. The CBES showed that financial stability risks from climate change should be lower where there is an orderly transition to net zero. Accordingly, the Bank is working domestically and internationally on approaches to support the financial system’s role in the economy’s transition to net zero. This includes the development and eventual adoption of coordinated and decision-useful disclosures, such as those being developed by the International Sustainability Standards Board and the Basel Committee on Banking Supervision, as well as the work being undertaken to develop transition plans.

  1. This is defined through the Bank of England Act 1998.
  2. Court has delegated the review of the strategy to the Financial Policy Committee (FPC) – as permitted by the Act – but Court retains ultimate responsibility for the strategy.
  3. The Financial Policy Committee agreed the strategy by written procedure.
  4. No revisions to the strategy were proposed in the 2020 review, and the FPC and Court agreed that there would be an opportunity to conduct a further review once the immediate disruption from Covid-19 had receded.
  5. Bank of England Annual Report and Accounts 1 March 2021-28 February 2022
  6. Under proposals in the Financial Services and Markets Bill, the PRA will receive an additional secondary objective on facilitating growth and competitiveness.
  7. Prudential Regulation Authority Business Plan 2022/23.
  8. The Financial Services and Markets Bill provides for a new FMI Committee that will be responsible for exercising the Bank’s FMI functions. This will include its regulatory functions of setting policy approaches and making rules in relation to CCPs and CSDs. The Bank’s Court of Directors can confer other functions on the Committee which could include functions in relation to payment firms if appropriate.
  9. United Kingdom: Financial Sector Assessment Program-Financial System Stability Assessment.
  10. Bank of England Annual Report and Accounts 1 March 2021-28 February 2022.
  11. Financial Services and Markets Bill – Parliamentary Bills – UK Parliament

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In July 2023 I accepted an invitation from the Court of Directors of the Bank of England to review economic forecasting at the Bank, with a particular emphasis on how forecasting can better support policymaking and communication during times of high uncertainty and structural change. This report is the product of that review. Earlier official reviews of the Bank’s forecasting include Stockton (2012) and Independent Evaluation Office (2015). I build to some extent on that earlier work. However, in light of the passage of time and, especially, the challenging economic environment of recent years, a fresh look at the construction and use of economic forecasts at the Bank seems timely.

In the process of conducting the review, I solicited a wide range of views. With the able assistance of Melissa Davey and her colleagues in the Bank’s Independent Evaluation Office (IEO), including Michael Lever and Sophie Stone,[1] as well as of Sam Boocker, my research assistant at the Brookings Institution, I conducted some 60 interviews of individuals and small groups. Interviewees associated with the Bank included all current MPC members, selected past MPC members, senior Bank staff, the independent chairs of the Bank’s Citizens’ Forums, and Bank Agents (who serve as regional representatives and information gatherers for the Bank). Separately, the IEO team, Boocker, and I also hosted a series of working lunches with representative groups of Bank staff from different divisions and at all levels of seniority.

For the perspectives of people outside the Bank, we interviewed UK print and broadcast journalists, financial market participants, other UK forecasters (including representatives of the Office for Budget Responsibility and the National Institute of Economic and Social Research), academics, and economists of the Trade Union Congress. I also met with the chairs of the relevant Parliamentary committees in both the House of Commons and the House of Lords to update them on the project and to hear their views. I would like to express my gratitude to all the interviewees, who were uniformly generous with their time and forthcoming in their responses to our questions.

Some of the interviews and meetings were conducted online. However, Boocker and I spent three weeks at the Bank during the period running up to the 2 November 2023 policy decision and were consequently able to meet in person with many individuals and groups, both internal and external to the Bank. Boocker and I both attended staff meetings and meetings between staff and MPC members at which the forecast was developed and debated. With special permission I (without Boocker) attended the meetings at which the MPC discussed and finalised its policy decision. We reviewed relevant academic articles, official documents, and related materials. With the IEO taking the lead, we conducted case studies bearing on the Bank’s forecasting and use of forecasts in recent years.

With substantial help from the IEO team, we compared the forecasting procedures and recent forecasting records of the Bank with those of six peer central banks: the US Federal Reserve, the European Central Bank, the Reserve Bank of New Zealand, the Bank of Canada, the Norges Bank (Norway) and the Sveriges Riksbank (Sweden). We also compared the Bank’s forecast accuracy with that of external forecasters. For background information on the peer central banks, we held online meetings with the staff leading the forecast process at each of those banks (except for the Federal Reserve, with which I am already familiar) and reviewed publicly available materials. The central bank staff members with whom we spoke were eager to be helpful, going out of their way to help us better understand their forecasting procedures, the roles of staff and policymakers in forecast development, and the use of forecasts in policymaking and communication at their institutions.

The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique, as peer central banks faced similar shocks and dealt with similar challenges. Still, the recent experience served as a stress test of forecasting at the Bank, including not only of the routine construction of forecasts but also of the use of forecasts in policymaking and public communication. The Bank, like other central banks and policy institutions, will be working to draw the appropriate lessons from this experience. The goal of this review is to assist in this effort.

Ben S. Bernanke
Brookings Institution
12 April 2024

Executive summary

This report reviews economic forecasting at the Bank of England. The report’s remit is broad (see Annex A for the published terms of reference). Specifically, the charge of the review is to ‘consider the appropriate approach to forecasting and analysis in support of decision-making and communications in times of high uncertainty from big shocks and structural change…’. To meet this charge, the report discusses and evaluates the current forecasting process at the Bank, including the adequacy of the forecasting infrastructure (data, software, and models); the utilisation of the staff; the process of constructing the quarterly forecast, including the interactions of the staff and the Monetary Policy Committee (MPC, or Committee); issues raised by high uncertainty and structural change; the use of the forecast in the MPC’s policy decisions; and the role of the forecast in the MPC’s communications with the public, the media, and financial market participants.

The structure of the report and its conclusions are summarised below. In brief, the recommendations made in this report have three broad objectives: first, to improve and maintain the Bank’s forecasting infrastructure, including data management, software, and economic models; second, to support an effective policy process by equipping the MPC and the staff to learn from past forecast errors, to identify and quantify risks to the outlook, and to deal with uncertainty and structural change; and third, to help the MPC better communicate its view of the economy, the risks and uncertainties surrounding its outlook, and the basis for and implications of the Committee’s policy choices.

Part I of the report sets the stage with some general observations, not specific to the Bank of England and optional for the informed reader, about the construction of economic forecasts and central banks’ use of forecasts in policymaking and in communications with the public. With that background, Part II describes the Bank’s current practices. Forecasts of the UK economy for the subsequent three-year period are constructed quarterly, in a process that begins in earnest some six weeks before a monetary policy meeting. Although Bank staff are responsible for producing a first draft of the forecast and providing supporting analysis, staff and MPC members work together to put together the final product, which is approved by the MPC. The forecast is subsequently published in the Bank’s Monetary Policy Report (MPR) and summarised in other official releases. Relative to other central banks, the forecast plays a particularly large role in the Bank’s public communications and accordingly receives considerable attention in the media and from financial market participants.

Part III compares the Bank’s processes and recent forecast accuracy with those of a set of peer central banks since 2015. We find that, while the accuracy of the Bank’s economic forecasts has deteriorated significantly in the past few years, forecasting performance has worsened to a comparable degree in other central banks and among other UK forecasters. The recent period was characterised by a series of large shocks that were, by their nature, difficult to forecast, and were generally not predicted by financial markets or external experts. Among these shocks were the pandemic itself, along with its economic and policy consequences; the sharp increases in oil, gas, and other commodity prices, especially following Russia’s invasion of Ukraine; and the sustained disruption of global supply chains during and following the pandemic. The large and correlated forecasting errors of central banks around the world during the past few years support the view that global shocks dominated local factors as sources of those errors at the Bank and elsewhere; and that, to the extent that deficiencies of forecasting methods or economic analysis account for the misses, the deficiencies were characteristic of the central banking community in general rather than the Bank alone. In short, given the unique circumstances of recent years, unusually large forecasting errors by the Bank during that period were probably inevitable. It is nevertheless important for the Bank to draw what lessons it can from the experience, including lessons regarding how it uses its forecasts, as other central banks will certainly do.

Part IV assesses the Bank’s construction and use of its forecasts and makes recommendations, listed below. In accordance with the objectives of our report, the recommendations are organised according to three major themes: building and maintaining a high-quality infrastructure for forecasting and analysis; providing a forecast process that better supports the MPC’s decision-making; and using the forecast to communicate the MPC’s outlook and policy rationale to the public.

Building and maintaining a high-quality infrastructure for forecasting and analysis

The most serious problems we found in our review are the deficiencies of the Bank’s forecasting infrastructure – the tools the staff uses to produce the quarterly forecast and supporting analyses. Some key software is out of date and lacks important functionality. With the staff fully engaged in the production of the current forecast, particularly during periods of extraordinary volatility, insufficient resources have been devoted to ensuring that the software and models underlying the forecast are adequately maintained (updated, stress tested, and periodically re-estimated). In particular, the baseline economic model, known as COMPASS, has significant shortcomings. These deficiencies in the framework, together with a variety of makeshift fixes over the years, have resulted in a complicated and unwieldy system that limits the capacity of the staff to undertake some useful analyses, including producing alternative forecast scenarios, using information gleaned from forecast errors to improve model specifications and forecasting methods, and considering alternative modeling frameworks. A positive development is that an effort to upgrade the data management system is under way. This report describes the issues with the forecasting infrastructure and makes four recommendations.

Recommendation 1. The ongoing updating and modernisation of software to manage and manipulate data should be continued with high priority and as rapidly as feasible. At completion, the modernisation project should ensure that:

(i) the economic and financial data available to the staff are comprehensive, covering all key sectors at the relevant frequencies; clearly defined, with sources provided; updated in a timely way; and easily searchable;

(ii) staff are able to export and transform data series as needed to construct figures, tables, and routine econometric analyses quickly and efficiently and with adequate source control;

(iii) large data sets, both time series and cross-sectional, can be ‘cleaned’ and used efficiently in substantive analysis and research; and

(iv) the inputting of data to the suite of economic and statistical models, especially for routine operations including forecasting and scenario analysis, is automated to the extent possible.

The Bank might consider whether adding a few data specialists to work with economists in accessing and working with data, especially larger and more complex data sets, would make the forecasting process work more smoothly.

Recommendation 2. Model maintenance and development should be an ongoing priority, supported by a significant increase in dedicated staff time and adequate resources, including specialised software as needed. To be most effective, the dedicated staff should have ample opportunities to interact with ‘front-line’ forecasting staff, MPC members, and external experts. The maintenance and development staff should ensure that forecasting models are regularly evaluated, re-estimated when new data become available, stress tested against alternative scenarios, and modified as needed to reflect new perspectives on the economy.

Recommendation 3. Over the longer term, the Bank should undertake a thorough review and updating of its forecasting framework, including replacing or, at a minimum, thoroughly revamping COMPASS. 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.

Recommendation 4. Based on the lessons of recent years, a revamped forecasting framework should include at least the following key elements:

(a) rich and institutionally realistic representations of the monetary transmission mechanism, allowing for alternative channels of transmission;

(b) empirically based modelling of inflation expectations, with a distinction between short-term (eg, one-year) and longer-term (eg, five to ten years) expectations, and without the assumption that longer-term inflation expectations are always well-anchored;

(c) models of wage-price determination that allow gradual adjustment and causation from prices to wages as well as from wages to prices;

(d) detailed models of the financial sector, the housing sector, the energy sector, and other key components of the UK economy;

(e) greater attention to, and ongoing review of, supply-side elements and their role in the determination of inflation and growth. Important supply-side factors include changes in productivity, labour supply, the efficiency of job-worker matching, supply-chain disruptions, and trade policy. Notably, analyses of inflation should consider supply-side factors as well as the state of aggregate demand.

Recommendation 4 is not intended to imply that the Bank’s current framework lacks all these features by any means. Rather, it is a checklist of key elements that a revamped framework should be sure to include.

Providing a forecast process that better supports the MPC’s decision-making

The goal of the forecasting process, of course, is to help the MPC make better policy decisions and to effectively communicate those decisions to the public. This report reviews how the MPC uses the forecast today, noting the evident strengths of the process but also suggesting possible improvements.

To deliver a forecast process that better supports the MPC’s decision-making, the report makes three related recommendations. We argue that the current bias toward making incremental changes in successive forecasts, together with the use of human judgements that paper over problems with the models, may slow recognition of important structural changes in the economy. Building on the joint analytical work of the staff and MPC during each forecast round, a systematic effort should be made to address these issues. In addition, policymaking could be made more systematic and coherent by supplementing the central forecast with additional information and analysis, notably insights drawn from alternative scenarios (including forecasts made based on alternative paths for the standard conditioning assumptions). Currently, the Bank regularly publishes a scenario that assumes constant interest rates, and in recent years it has occasionally used scenarios to explore the consequences of energy price shocks and other risks. Expanded use of alternative scenarios would facilitate comparisons of possible policy choices, more accurately quantify the risks to the forecast, and help the Committee learn from past forecast errors. The report also suggests possible changes in the use of personnel, including incentivising the accumulation of experience in key substantive areas and making better use of the share of PhD researchers’ time devoted to policy work.

Recommendation 5. Incrementalism (the practice of basing new forecasts on previous forecasts, with marginal adjustments) and the use of ad hoc judgements may obscure deeper problems with the underlying forecasting framework or unrecognised changes in the structure of the economy. The staff should be charged with highlighting significant forecast errors and their sources, particularly errors that are not due to unanticipated shocks to the standard conditioning variables. Models and model components that may have contributed to forecast misses should be regularly evaluated and discussed, as well as the determinants of variables whose forecasts are consistently dominated by extra-model judgements. Staff should routinely meet with MPC members to consider whether structural change, misspecification of models, or faulty judgements warrant discrete changes to the key assumptions or modeling approaches used in forecasting. Willingness to modify existing frameworks and to consider new data or other information is particularly important during periods of high uncertainty. The Bank should also build on existing vehicles for external engagement to capture a broad range of views.

Recommendation 6. The Bank should review its personnel policies to determine if existing staff could be deployed in ways that improve the forecasting infrastructure and forecast quality. In general, employees should be more strongly encouraged and incentivised to accumulate experience and expertise in specific substantive areas (eg, through in-role promotions), rather than being forced to change fields or responsibilities to get promotions and raises. Researchers with doctorates should continue to spend part of their time in undirected or loosely directed research, with the best researchers afforded the opportunity to continue working on their individual agendas throughout their careers. However, during the portion of their time devoted to current forecasting and analysis, employees with more advanced degrees should be rewarded for taking leading roles, especially in longer-term model maintenance and the development of new and existing models. PhD researchers can also contribute by undertaking substantive analyses directly related to current issues and, as appropriate, by being given the chance to lead in technical areas that make good use of their training and research experience.

Recommendation 7. To improve the MPC’s policy discussion, the central forecast should be regularly augmented by alternative scenarios, with the specific scenarios ideally decided upon at an early stage of each forecast round by the MPC and staff. Among the types of scenarios that could be considered are those that: (1) allow for direct comparisons of the likely effects of alternative policy paths on the outlook; (2) help to assess the effects and costs of possible risks to the outlook arising from unexpected changes in exogenous variables; (3) can be used to evaluate the effects of the Committee’s policy choices on the economy if one or more of its key assumptions about the structure of the economy are wrong; and (4) can be used to decompose historical forecast errors into portions due to judgements, conditioning assumptions, and other factors.

Using the forecast to communicate the MPC’s outlook and policy rationale to the public

Effective communication is essential for effective monetary policy. Good communication helps the public understand the rationale and implications of policy choices and can make policy work better by helping to anchor inflation expectations and by influencing asset prices. Relative to other central banks, the Bank of England relies heavily on its central economic forecast (which, it should be emphasised, involves human judgement and diverse information sources as well as the output of econometric models) as a communications device. This report argues that the publication of selected alternative scenarios along with the central forecast would improve the Bank’s communications, providing the public with additional useful information about the rationales for policy choices, the risks to the forecast, and the robustness of the MPC’s policy plans in the face of uncertainty about key aspects of the economy’s state and structure.

Recommendation 8. The publication of selected alternative scenarios in the MPR, along with the central forecast, would help the public better understand the reasons for the policy choice, including risk management considerations. The publication of selected alternative scenarios could also provide the public with information about the Committee’s policy reaction function and its views of the monetary transmission mechanism. The MPC should determine which scenarios are published, choosing those that members deem to be most informative about the policy decision at a particular time. There should be no presumption that the same scenarios will be published in each MPR.

The Bank’s forecast is conditioned on a set of standard, externally determined assumptions about the future course of policy rates, fiscal policy, exchange rates, and commodity prices. Unfortunately, these standard conditioning assumptions – for example, the assumption that future policy rates will follow the path revealed in futures markets – may not always accurately represent the views of the MPC, with the result that the central forecast may not fully reflect the Committee’s outlook for the economy. This report makes two related recommendations regarding the standard conditioning assumptions.

Recommendation 9. Because the standard conditioning assumptions do not necessarily reflect the MPC’s views but can have potentially significant effects on the forecast, and because the central forecast by itself does not provide a clear rationale for policy decisions, the MPC should de-emphasise the central forecast based on the market rate path in its communications and be exceptionally clear in warning about situations in which it judges the standard conditioning assumptions to be inconsistent with its view of the outlook. Methods for doing this include giving more attention to published alternative scenarios in discussions of the outlook and policy; emphasising to an even greater degree the conditionality of the forecast on exogenous assumptions not chosen by the MPC; and, when appropriate, using the MPC’s limited discretion to modify the standard conditioning assumptions. Judgemental adjustments might also be used to offset the effects on the forecast of conditioning assumptions with which the Committee disagrees, but that approach has the significant disadvantage of sending inaccurate signals to market participants about the MPC’s assessment of the rate path consistent with the Committee’s objectives.

Recommendation 10. To put less emphasis on the central forecast, to simplify its policy statement, and to reduce repetitiveness in its communications, the MPC should replace or cut back the detailed quantitative discussion of economic conditions in the Monetary Policy Summary in favour of a shorter and more qualitative description, following the practice of most peer central banks.

A more aggressive approach to addressing the problem of potentially inappropriate conditioning assumptions, following the practice of several peer central banks, would be to replace the market-based path for the policy rate with the MPC’s own forecasts of Bank Rate, based either on a collective judgement or by aggregation of individual member judgements. However, that change would be highly consequential and this report recommends leaving decisions on this issue to future deliberations.

Communicating to the public the high degree of uncertainty associated with any economic forecast is important. Currently, the MPC uses fan charts to convey the range of uncertainty in forecasts of key economic variables at varying horizons. The report argues that fan charts suffer from significant analytical weaknesses and have outlived their usefulness.

Recommendation 11. Despite their distinguished history, the fan charts as published in the MPR have weak conceptual foundations, convey little useful information over and above what could be communicated in other, more direct ways, and receive little attention from the public. They should be eliminated. However, it remains important to communicate the degree of forecast uncertainty and the balance of risks. A section in the MPR should be devoted to uncertainty and the balance of risks in the forecast. Beyond verbal discussion that describes uncertainty and risk in qualitative terms (terms that should be echoed in other Bank releases), this section could include the record of forecasting errors by the Bank, perhaps including new time series figures and discussion; an analysis of recent forecast errors, together with steps taken (if any) to correct the factors that contributed to those errors; and an overview of the risks to the outlook, possibly with reference to alternative scenarios published in the MPR. Mean forecasts as currently constructed do not provide additional useful information and should also be dropped from publications in favor of more qualitative descriptions of risks and uncertainty surrounding the outlook.

Importantly, this report’s proposed changes to the use of the forecast in policymaking and communication are dependent on improving the capabilities and flexibility of the forecasting infrastructure. Accordingly, the last recommendation is about sequencing and resources.

Recommendation 12. A phased approach to implementing changes proposed in this report, focused first on improving the forecasting infrastructure, while moving cautiously in adopting changes to policymaking and communications, is likely to be necessary. To facilitate infrastructure improvements and address existing deficits, the commitment of additional resources will be required, at least for a time.

Part I: Why and how do central banks forecast?

Economic forecasting is difficult even under the best of circumstances. Modern economies are complex and ever-changing, and they are subject to unpredictable shocks, including non-economic shocks such as pandemics or wars. Even the current state of the economy is difficult to observe (‘nowcasting’ the economy is a specialised skill) as most economic data are available only with a lag and provide at best a rough, statistically noisy, and often subject to revision snapshot of current economic developments. Recessions – periods of economic contraction – are particularly difficult to anticipate. Many economists expected a recession to occur in the United States in 2023, for example, but economic growth and job creation remained strong. This is not to say that economic forecasting is impossible – both experience and formal studies confirm that forecasts made in real time do contain useful information about the future courses of key economic variables – but it is inevitably subject to a high degree of uncertainty, uncertainty which increases rapidly for forecasts of the more distant future and during periods of large shocks or rapid structural change.

So why do central banks and other policymakers continue to devote so much time and resources to making economic forecasts? For central banks, forecasts are important for two broad reasons: they aid in the formulation of policy. And they are a tool for communicating policy plans and rationales to the public and financial markets.[2]

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boe’s response:

The Bank of England was delighted that Dr Bernanke agreed to conduct a review on its behalf into the Bank’s forecasting and related processes during times of significant uncertainty. It is very grateful to Dr Bernanke for his ‘Forecasting for monetary policy making and communication at the Bank of England: a review’ (‘the Review’).

The Review provides a careful and thorough assessment of the Bank’s current forecasting methods and the relationship between forecasts, monetary policy decisions and their communication. It sets out 12 recommendations that determine a clear direction of travel for the Bank’s forecasting methods and the role of forecasts and broader analysis in monetary policy discussion, formulation and presentation, while allowing for a range of design options for specific changes.

The Bank welcomes and is committed to action on all 12 of the Review’s recommendations. The recommendations are wide ranging and interconnected. As such, the Bank will need to consider the design and associated implementation options in depth and will provide an update on proposed changes by the end of the year.

Forecasting and related processes during times of significant uncertainty

The global economy has experienced an unprecedented series of shocks in recent years, including substantial supply disruptions, resulting in high inflation and elevated uncertainty.

In an environment where “shocks have been of a different nature, and their impact has been more uncertain”[1] forecasting naturally became more difficult. The Review provides a thorough evaluation of how the Bank’s forecasting framework has performed during a period of large and unprecedented shocks.[2] It notes that the Monetary Policy Committee’s (MPC’s) forecasting performance has been similar to that of other central banks and UK private-sector forecasters.

Even so, as inflation falls towards the MPC’s target, it is appropriate to reflect – and act – on the lessons of recent years. The Review presents a unique and valuable opportunity to develop and strengthen the Bank’s processes in support of the MPC’s forward-looking approach to the formulation and communication of monetary policy.[3] Designing and delivering change will require detailed planning and careful implementation.

Two broad themes underpin many of the Review’s assessments and recommendations and are likely to guide the design of future changes:

  • Substantial investment is needed, beyond that already underway, to develop key parts of the data, modelling, forecasting and evaluation infrastructure and the expert staff to support them.
  • Within an overall approach that assigns more prominence to risks and welcomes challenge to underlying assumptions, the role of the central projection and the MPC’s discussions surrounding it should be reconsidered.

Infrastructure investment

As noted in the Review, the Bank has already embarked on considerable investment in infrastructure.[4] In early 2023 the Bank began a Future Platform programme to manage the move to a new product for accessing, analysing and visualising data. This is part of a wider data portfolio that will provide the Bank with a new environment for working with data on the cloud and will modernise the production of the monetary and financial statistics, which are themselves an important input into the monetary policy process. This will not only address limitations of the existing infrastructure but also enable staff more easily to automate processes, as well as to work with the increasingly large and complex data sets that are now commonly utilised by the central banking community. These improvements will make routine tasks more efficient thereby freeing up staff time for more productive activities. As this initiative predated the Review, the Bank will explore the extent to which further expansion of these activities is required.

The unusual shocks over the recent period have also revealed some challenges to the Bank’s use of forecasting models. The Bank’s approach has long recognised the value of using a suite of models so that insights can be drawn from a range of alternative approaches. A range of models is used to assess the implications of different shocks and to inform the application of judgement to forecasts. However, through the recent period of unprecedented shocks, it has been particularly difficult to incorporate systematically and coherently these assessments into a central projection. In particular, when constructing the central projection it has been challenging to achieve a good balance between model-based insights and human judgements.

Ensuring that the Bank’s modelling toolkit and forecast approach – and the MPC discussions that they support – are robust to the future economy will require a reconsideration of how models and analytical work are used. There are several possible options for a core modelling framework, as the Review notes,[5] as well as possibilities for how other analytical work is incorporated. The appropriate choice of core modelling framework will require careful consideration, including an assessment of whether any of several models currently under development at the Bank would be suitable (including a redevelopment of COMPASS[6] and a new semi-structural model). An equally important consideration will be the design of a strategy that allows staff to draw insights from a suite of models and analytical work as efficiently and flexibly as possible. More broadly, the Bank recognises that continual improvement of tools and models in light of experience should be a priority.

The role of the central projection

The second key theme of the Review is that the role of the central projection within the processes for discussing and communicating monetary policy should be reconsidered. A forecasting framework that performed well during periods in which inflationary shocks were relatively small may be less robust during periods of large and unusual shocks and the associated heightened uncertainty, or in an economy transformed by structural changes, for example the emergence of artificial intelligence, or a realignment of trading relations.

Forecasts have played a central role in the MPC’s policy strategy and communications since its inception in 1997. As noted in the Review, the lags between monetary policy decisions and their effects on the economy mean that it is the prospects for inflation, rather than its current rate, that are most relevant to the MPC. Monetary policy actions have larger effects on inflation over the subsequent one or two years than in the very near term.

In more stable periods, when shocks are small and the behaviour of the economy is well understood, these insights can be used to formulate a simple monetary policy strategy in which the policy rate is adjusted up or down when the medium-term inflation forecast is expected to be above or below target (Haldane (1998)). An important property of such a strategy is that its formulation within the central bank is mirrored in the public communication of its policy decisions. The central bank’s inflation forecast is a powerful vehicle for rationalising and explaining policy decisions: they are a “joint product”.[7] This property is a strength of such an approach, when it is working well, because it simplifies communications by allowing them to be presented within an internally consistent framework.

The Bank’s forecast and monetary policy making processes have been designed to support this strategy: the forecast meetings and the processes that underpin them play a central role in supporting the MPC’s policy discussions during Monetary Policy Report rounds.[8] Despite this prominent role in the process, forecasts are ultimately a means to an end: the formulation and communication of the appropriate monetary policy to achieve the inflation target (King (2002)).

Indeed, in many cases a single forecast is not sufficient to provide a mechanical link to the appropriate policy. For example, the future paths of a number of variables (including Bank Rate) are ‘conditioned’ on particular conventions that, on average, are likely to be plausible forecasts while also avoiding the risk of being misinterpreted as an endorsement by the MPC. However, they will not at every moment in time represent the paths for those variables that members of the MPC judge to be most likely. Moreover, it may be appropriate for monetary policy to respond to risks that are not captured by a single forecast. In practice, therefore, the Bank’s approach includes several elements of flexibility in the connections between the forecast, the policy decision and their communication. These include the regular production of forecasts under alternative paths for Bank Rate (based on market expectations and a constant rate assumption), the use of fan charts to communicate the balance of risks and occasional adjustments in the assumptions underlying the conditioning paths.[9]

For much of the period since the creation of the MPC, when inflationary shocks were relatively small, this approach worked well. Inflation was relatively stable and close to target (Carney (2020)), inflation forecast errors were small and similar to peer central banks[10] and the framework was a well-understood means of communication with external audiences. Over recent years, however, large and unprecedented global shocks have made forecasting more difficult and revealed some constraints within the Bank’s existing approach,[11] and the MPC needed to use all aspects of its “limited discretion” in the construction and communication of its forecasts.[12]

An approach that places relatively less weight on a central projection may be more robust in such an environment in the future. This could also offer an opportunity to systematise the application of insights from a wide range of staff analysis and research to the monetary policy making process. The Review offers a number of options for adjusting the relative focus on a central projection in internal processes and external communications, including the use of scenarios, consideration of alternative conditioning assumptions and adjustments to the mix between quantitative and qualitative information in communications.

Design considerations

The Bank will consider the implications of the recommendations carefully since the consequences could affect many aspects of the monetary policy making process including infrastructure, models, staffing, the internal processes for production and discussion of the forecast and policy strategy, and the number and nature of external communications.

For example, as noted in the Review, the production of scenarios alongside a central projection could have several distinct benefits including the ability to consider the key risks to the macroeconomic outlook and communication of the monetary policy reaction function.[13] The wide-ranging nature of these benefits also implies that a greater role for scenarios could have large effects on internal processes, model development activities and communication. Some of these connections are described below.

Scenarios have the potential to offer a better means of articulating the balance of risks around the outlook. To implement scenarios the Bank will need to ensure that the forecasting system is sufficiently flexible and efficient to support the production of multiple alternative views of the outlook. In addition to updates to infrastructure this will require adjustments to the staffing model including the relevant incentives and development opportunities for staff. Another important design consideration will be the process by which the most policy relevant risks are selected: identifying an appropriate number and type and when a scenario should be published externally. Internal processes will also need to provide sufficient time within MPC discussions to consider scenarios and their policy implications, potentially reducing the time available to formulate and discuss the central projection. Finally, communications will need to adapt to ensure that the roles of the central forecast and of different scenarios in explaining the policy outlook are clear.

In principle, fan charts can be used to communicate prevailing risks in the context of past forecast errors and emphasise that those risks may span a wide range of possible outcomes. However, in practice fan charts have not proved to be an effective way of communicating with the public about risks to the macroeconomic outlook.[14] The extent to which scenarios can serve as a sufficient substitute for fan charts in the communication of risks will require careful consideration, as will whether there are alternative communication strategies that convey this information, as noted in the Review.

An approach that draws more on scenarios also has the potential to articulate better differences of view among Committee members. This could relieve some of the challenges in agreeing a ‘best collective judgement’ forecast.[15] However, internal processes will need to adapt to ensure that significant differences of view are well captured by scenarios, and that the process continues to support the development of a clear collective narrative about the most important factors influencing monetary policy.

These types of wider-ranging effects will similarly apply to other recommendations in the Review.

Acting on the recommendations therefore requires the Bank to consider substantial changes to key components of the existing forecasting and policy processes. Some of those changes will systematise and prioritise the way that existing types of research and analysis are used to inform the MPC’s approach to setting and communicating monetary policy. Others will require more fundamental changes. Careful thought will be needed to ensure that an updated approach builds on existing strengths. For example, it will be important to maintain continuity in several key elements, including the focus on transparency and accountability, and the forward-looking approach to monetary policy.

Next steps

The intertwined nature of many of the Review’s recommendations means that it will take some time to develop detailed plans as well as to manage their implementation. The Bank will initiate a substantial upgrade programme, the complete scope of which is to be determined, but that is likely to include at least the following workstreams:

  • Continuing and extending existing infrastructure and modelling investment projects essential to provide the foundations for a future approach.
  • Embedding a state-of-the-art approach to forecast error evaluation and a process to ensure that the results of such evaluations lead to improvements in models and techniques.
  • Designing and implementing a more efficient forecasting approach – including the role of forecasts in MPC discussions and decision making – that reconsiders the role of the central projection, augmenting it with scenarios.
  • Enhancing the assimilation of alternative approaches, staff research, Bank surveys and cross checks using internal and external analysis.
  • Evaluating communications products, ensuring that they are focused on the key determinants of the monetary policy outlook.
  • Developing incentives for expert staff to lead model development and infrastructure investment activities and providing opportunities to progress through building expertise.

These workstreams will build on further investigation of the lessons from recent years, some of which is already underway. For example, staff work is exploring the sources and nature of recent forecast errors using methods that help to identify parts of the forecasting approach that could particularly benefit from further development and improvement.[16]

As noted in the Review, a phased approach to implementing changes is likely to be appropriate for a programme of this scale.[17] The Bank therefore intends to introduce discrete ‘packages’ of changes over time, as the relevant stages of the workstreams are completed.

The MPC welcomes Dr Bernanke’s review and endorses the Bank’s commitment to action as outlined in the workstreams above. It will remain involved closely throughout the design and implementation phases.

The Court of the Bank, which commissioned the Review, also supports the Bank’s commitment to action on the recommendations and will continue to ensure that resources are in place to allow for the effective and efficient discharge of the Bank’s monetary policy function, in line with the Bank of England Act (1998).

The Bank is committed to reporting on progress in a transparent way. It will update the Court on progress against the workstreams above at appropriate intervals, consistent with the Court’s oversight function, and will provide an update externally by the end of the year.

  1. See the Review’s Terms of Reference

Based on the provided texts, which include the Bank of England’s (BoE) Financial Stability Strategy and the Bernanke Review of the BoE’s forecasting (along with the BoE’s response), we can identify potential areas where causes of action in tort and contract might theoretically arise, who potential class action members could be, and who the possible responsible parties are.

It is crucial to state upfront that successfully suing a central bank like the Bank of England for the types of issues raised (particularly around forecasting and broad financial stability) faces extremely high legal hurdles in the UK. These include establishing a duty of care owed to specific claimants for economic loss, proving causation, and overcoming arguments of public policy and the statutory framework within which the BoE operates. Claims in contract are even less likely in this context for the general public or market participants.

That said, let’s explore the possibilities as per your request:

I. Potential Causes of Action

A. Tort

  1. Negligence (specifically, negligent misstatement or negligent performance of duties):

    • Basis: This would argue that the BoE (or its relevant bodies like the MPC or FPC) owed a duty of care to certain parties, breached that duty by failing to meet a reasonable standard of care in its forecasting, analysis, risk assessment, or regulatory oversight, and that this breach caused foreseeable financial loss.
    • Evidence from texts:
      • The Bernanke Review highlights “serious problems” with the BoE’s forecasting infrastructure: “Some key software is out of date and lacks important functionality,” “insufficient resources have been devoted to ensuring that the software and models underlying the forecast are adequately maintained,” and “the baseline economic model, known as COMPASS, has significant shortcomings.” (Bernanke Review, Executive Summary, Part IV)
      • Recommendation 5 of the Bernanke Review notes: “Incrementalism… and the use of ad hoc judgements may obscure deeper problems with the underlying forecasting framework or unrecognised changes in the structure of the economy.”
      • Recommendation 9 critiques the reliance on standard conditioning assumptions for forecasts that “do not necessarily reflect the MPC’s views,” potentially leading to misleading communications.
      • The Financial Stability Strategy itself outlines numerous responsibilities (e.g., “identifying, monitoring, and taking action to remove or reduce systemic risks” by the FPC; “supervise firms to promote their safety and soundness” by the PRA). A demonstrable failure to perform these due to the identified shortcomings could be framed as negligence if it led to specific, avoidable harm.
      • The Bernanke Review notes the LDI crisis (September 2022) and the Bank’s intervention. If it could be argued that the BoE’s prior understanding, supervision, or stress-testing of NBFIs (including LDI funds) was deficient (as hinted at in the Review’s call for better modelling and the FSS’s point 11 on preparing for emerging risks in NBFIs), this might be a focal point.
    • Challenges: Establishing a specific duty of care to individual investors or businesses for general economic forecasting or monetary policy decisions is exceptionally difficult. Causation is also a massive hurdle – attributing specific losses to BoE failings versus global shocks, government policy, or other market factors.

  2. Breach of Statutory Duty:

    • Basis: This would argue that the BoE failed to comply with its statutory duties (e.g., under the Bank of England Act 1998 regarding financial stability or price stability) and that this failure caused loss to a claimant who the statute intended to protect.
    • Evidence from texts:
      • The Financial Stability Strategy is defined through the Bank of England Act 1998. The document outlines the financial stability objective.
      • The FPC, PRA, and FMI Board have statutory responsibilities.
    • Challenges: It’s rare for a breach of statutory duty by a public body to give rise to a private law claim for damages unless the statute expressly or implicitly provides for it. Remedies are more typically sought through judicial review.

B. Contract

  • Basis: This would require a specific contract between the BoE and a claimant, where the BoE breached a term of that contract, leading to loss.
  • Evidence from texts: The provided texts do not suggest any contractual relationships with the general public or typical financial market participants that would give rise to claims based on forecasting errors or general financial stability management. The “Memorandum of Understanding” between HMT, the Bank, and PRA is an inter-governmental agreement and unlikely to create contractual rights for third parties.
  • Challenges: Highly unlikely to be a viable cause of action for the issues discussed for most potential claimants.

II. Potential Class Action Members

A class action requires a defined group of people who have suffered similar harm from the same alleged wrongdoing.

  1. Investors/Financial Market Participants:

    • Basis of claim: If they could demonstrate they made specific investment decisions in reliance on BoE forecasts or statements that were negligently prepared and misleading, and suffered quantifiable losses as a direct result.
    • Link to texts: Bernanke Review’s criticisms of forecast accuracy, infrastructure, and communication (e.g., if market-based conditioning assumptions were known to be misaligned with MPC views but presented without sufficient caveats).
    • Example: Participants in markets directly affected by monetary policy decisions or financial stability interventions (e.g., gilt market participants during the LDI crisis if negligence in BoE’s handling or pre-crisis assessment could be shown).

  2. Pension Fund Members / LDI Fund Investors:

    • Basis of claim: If it could be argued that the BoE’s failings in understanding or supervising risks in the non-bank financial institution (NBFI) sector, particularly Liability-Driven Investment (LDI) funds, contributed to the instability in September 2022, and that this caused avoidable losses to these funds and their ultimate beneficiaries.
    • Link to texts: Bernanke Review’s reference to the LDI crisis; Financial Stability Strategy point 11 on the BoE’s work to understand risks from NBFIs and the planned exploratory stress scenario exercise for NBFIs. The Bernanke Review (Rec 14) notes the BoE’s intervention “exposed vulnerabilities in liability-driven investment (LDI) funds.”

  3. Depositors or Policyholders (of specific failed institutions):

    • Basis of claim: If a specific bank, building society, or insurer failed, and it could be proven that this failure was due to negligent supervision by the PRA (part of the BoE) or a broader negligent failure in maintaining financial stability directly attributable to the BoE, leading to losses for depositors/policyholders beyond what is covered by the Financial Services Compensation Scheme (FSCS).
    • Link to texts: Financial Stability Strategy points 4 (supervision of firms), 7 (resolution of firms), and the PRA’s objective to protect policyholders.

  4. Businesses and Individuals suffering broader economic harm:

    • Basis of claim: If it could be proven that significantly flawed BoE forecasts led to demonstrably erroneous monetary policy decisions (e.g., interest rates kept too low for too long, or raised too aggressively) which, in turn, directly caused avoidable recessions, excessive inflation, or other widespread economic damage.
    • Link to texts: The entire Bernanke Review discusses how forecasting supports policymaking. If policy was systematically flawed due to negligent forecasting, this could be the argument.
    • Challenges: This is the broadest and by far the most difficult group to establish a claim for, due to overwhelming causation issues and the nature of monetary policy decisions affecting the entire economy.

III. Possible Responsible Parties

  1. The Bank of England: As the overarching institution.

    • Specific bodies within the BoE could be identified as having primary responsibility for the alleged failings:
      • The Monetary Policy Committee (MPC): For decisions related to monetary policy and the forecasts underpinning them. The Bernanke Review focuses heavily on processes supporting the MPC.
      • The Financial Policy Committee (FPC): For its role in identifying and mitigating systemic risks. The Financial Stability Strategy outlines its responsibilities.
      • The Prudential Regulation Authority (PRA): For the supervision of individual firms (banks, insurers). The Financial Stability Strategy outlines its role.
      • The FMI Board (soon to be FMI Committee): For the supervision of financial market infrastructures.

  2. HM Treasury (HMT):

    • While the BoE is operationally independent for monetary policy, HMT sets the overall financial services regulatory framework. The Financial Stability Strategy notes HMT “determines the regulatory framework for the UK financial system.” If flaws in this framework contributed to problems, HMT could be implicated, though likely in a public law or political rather than private law damages context. HMT is also involved in resolutions involving public funds.

Summary of Key Challenges for Claimants:

  • Duty of Care: Establishing that the BoE owes a specific, actionable duty of care to individual citizens or businesses for economic losses arising from its macroeconomic forecasting or general financial stability functions is very difficult. Courts are wary of opening “floodgates” and interfering with the policy-making functions of public bodies.
  • Causation: Proving that a specific failing by the BoE directly caused a specific financial loss, rather than myriad other economic factors (global events, fiscal policy, market sentiment), is an immense hurdle.
  • Standard of Care: While the Bernanke Review points to deficiencies, it also notes that “forecasting performance has worsened to a comparable degree in other central banks and among other UK forecasters” due to “a series of large shocks that were, by their nature, difficult toforecast.” Distinguishing negligence from errors made in an inherently uncertain environment would be key.
  • Public Policy: Courts may be reluctant to allow claims that could hamper the BoE’s ability to perform its essential public functions.
  • Alternative Remedies: Judicial review is a more common avenue for challenging the lawfulness of actions by public bodies, though it typically doesn’t result in damages in the same way a tort claim would.

While the Bernanke Review and the BoE’s response indicate a recognition of issues and a commitment to improvement, translating these into successful legal claims for damages, especially class actions, would be an exceptionally challenging undertaking. The most (relatively) targeted areas for scrutiny might revolve around specific market interventions (like the LDI crisis) or failures of supervised firms, if a direct link to the identified deficiencies in forecasting, risk assessment, or infrastructure could be plausibly alleged and proven to have caused specific, quantifiable losses to an identifiable class.

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