Bank of England tweaks Forecasting Model

The Bank of England's core forecasting model is to be revamped by the year-end but those hoping for a fundamental change of approach will be disappointed. It will be more a technical upgrade than an admission that their model was lacking.

Compass, as the new model is known, was conceived not as a response to the bank's dismal forecasting record but as a way of simplifying and streamlining its existing models. The BoE took the decision to build new software at the start of 2008, before the credit crunch exposed the flaws of its traditional forecasting tools.

At that time, inflation had only just peeped above target and the central bank's inflation-fighting credentials remained intact. The BoE intends to run both models in parallel for a while and hopes the shift from old to new will be so subtle members of the Monetary Policy Committee (MPC) will not notice any difference.

For critics of the BoE's forecasting process, that is an opportunity lost. The central bank's failure to foresee a surge in inflation has taken a heavy toll on its reputation and left Britain persistently with the highest inflation rate of Group of Seven countries.

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