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Fear of Inflation is Skewing Bank of England Inflation Predictions and Limiting Bank's Appetite

Originally Published 7 August 2001
On the eve of the publication of the latest Bank of England inflation forecast new research by Professor Ken Wallis of the University of Warwick's Department of Economics shows that the bank's very fear of the consequences of high inflation is feeding into their inflation calculation predictions and skewing the result.

Professor Wallis shows that over the first three years of its inflation forecasts the Monetary Policy committee's one year ahead forecasts has on average been 0.2% too high. The forecasts averaged 2.4% and the actual RPIX outcomes averaged 2.2%. These consistently higher results have probably restricted the ability of the "Doves" on the Bank's to win a majority to implement interest rates cuts. Professor Wallis feels its likely that there will be more interest cuts before the end of the year.

Professor Wallis welcomes the MPC's use of the "Rivers of Blood" fan chart to demonstrate the uncertainties about future inflation but the fan charts are now shown to overstate that uncertainty and the "upside risks" often emphasised in the Bank of England's commentary on each forecast they make seem to have been exaggerated. This may have further discouraged the Doves.

One of the tables from that report appears below but the full research report can be found in pdf format via the web link in its title which follows: Chi-squared Tests of Interval and Density Forecasts, and the Bank of England's Fan Charts.

For further details please contact:

Professor Ken Wallis
Department of Economics
University of Warwick
Office: 024 7652 3468
Home: 024 7641 4271
K.F.Wallis@warwick.ac.uk

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University of Warwick
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West Midlands
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