LONDON (MktNews) - The Bank of England's inflation forecast has significant problems and needs to be "more informative," said Sushil Wadhwani, an external member of the Bank of England's rate-setting Monetary Policy Committee, in an interview published Friday.
Wadhwani was replying to a question put by the magazine Central Banking. It asked him what he thought of the idea suggested in a report by Federal Reserve official Don Kohn of a governor's or bank's forecast which MPC members could argue for or again.
Wadhwani said that the forecast in its current form is open to misinterpretation. Some commentators, he said, were unhappy with it an thought there should be a completely rigid link between the forecast and the interest-rate decision.
He said this showed that they are placing too much emphasis on the forecast and stressed that the forecast, while important, is only only one input into the decision. "Having said that," he noted, "obviously we must always to communicate better."
The Bank currently publishes a table (6B) in the Quarterly Inflation Report which shows the range of different forecasts around a central projection. Wadhwani said this attempts to display some of the differences among committee members on key issues which go into the forecast.
But he acknowledged that people are still concerned they do not understand the forcast, so "it is possible that we need to do more."
He suggested that the Inflation Report should actually show whether committee members agreed or did not agree with certain ranges.
The process would be more transparent if the Inflation Report contained a new table with a column entitled "modal forecast", showing inflation ranges, and a column with a number showing how many committee members had a modal forecast in that range, he said.
"I think that would be more informative than what we currently use," said Wadhwani, who added that market participants had told him they would find this helpful.
Wadhwani argued that in a democracy a central bank has to show that it is accountable. While pointing out that in some cases transparency is undesirable, for example in the case of intervention on foreign exchange markets, as a general rule, more rather than less transparency "helps the process of accountability."
In this context, having external members on the committee is necessary because they are in a position to start debates in public on some issues of monetary policy and help to foster confidence in the institution of monetary policymaking.
"External members find it easier to raise controversial issues in public because they speak in an individual capacity and not for the Bank.
"I think it is quite important for the credibility of policymaking, and for its general acceptance by the public, that this dialogue takes place," he said.