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BOE’s Broadbent Says Forecasting Errors Likely After Shocks

Bank of England policy maker Ben Broadbent said the central banks’ projection errors in the wake of the financial crisis are understandable given the inevitable limits of economic forecasting.

It’s reasonable “to ask whether the Monetary Policy Committee and other forecasters have taken too long to register the full impact of the financial crisis,” Broadbent said in a speech in London today. “The problem is that, after a significant and persistent shock, you may well need time to learn about its implications. As you do so, you are likely to make repeated forecast errors in the same direction.”

The BOE is dealing with the findings of a review into its forecasting by former Federal Reserve official David Stockton that found shortcomings in its processes. The MPC conducts a quarterly forecast round and its policy decision next week will be guided by its latest projections.

“The mere existence of ‘errors’ -- even the word is something of a misnomer -- is not, in and of itself, evidence that something is wrong, or even improbable,” Broadbent said in the speech at Queen Mary, University of London.

He said that the greater the degree of randomness, the more time is needed to assess the merits of different forecasting models. And people are “genetically under-endowed with the patience” needed to make distinctions in assessing forecasting processes, he said.

“We are naturally too inclined to see structure in what is actually random,” Broadbent said. “We are also too inclined to view a forecast ‘error’ as precisely that: someone’s mistake.”

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