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Bank of England revising forward guidance policy

Shaun Vahey, Professor of Economic Modelling and Forecasting, comments on the Bank of England revising its forward guidance policy.

Ahead of any announcement from the Bank of England, Professor Shaun Vahey said: “Looking at the many ways forward guidance is issued across the globe the best method is the one used by the ‘shadow’ monetary policy boards of New Zealand and Australia.

“Members of these Down Under committees publish individual probabilistic interest rate assessments, together with an aggregate or consensus view - for a variety of horizons in the case of Australia.

“The Bank of England could do the same, giving probabilities for the interest rate in six months and a year’s time.

“Just as they do in these two countries, the probabilistic forecasts from individual MPC members should be aggregated utilising simple but well understood opinion pools.

“For example, the consensus might give 66 per cent chance – or a high probability - of a hike to one per cent in six months and 33 per cent – or moderate - probability of it being 1.5 per cent in 12 months.

“Used consistently to describe the key probabilities, verbal descriptions should convey probabilistic information that the public would find helpful in making economic decisions.”

To speak to Professor Vahey, email him at Shaun.Vahey@wbs.ac.uk or call 024 765 28107.