LONDON The Bank of England should open up to a broader range of views when producing its economic forecasts and clarify the role of its key committees in policy decisions, three independent reviews of the central bank's operations recommended.
Following are some of the key recommendations:
MONETARY POLICY COMMITTEE'S FORECASTING CAPABILITY:
The review, conducted by David Stockton, former director of research and statistics at the Board of Governors of the U.S. Federal Reserve, suggested integrating a wider range of views in the forecasting process and to improve communication.
The review lists 21 options to improve forecasts, including:
- Increase the detail with which the financial sector is incorporated into the growth and inflation forecast and the models;
- Produce a staff forecast and present that forecast to the bank's Monetary Policy Committee prior to each Inflation Report;
- Increase the participation and influence of specialists within the Monetary Analysis Directorate in the forecast process;
- Analysis of monetary policy options and strategies could be included routinely in the background materials and briefings prepared by staff for every forecast round;
- Provide greater detail about the consensus forecast;
- Consider publishing a summary of the individual forecasts of the MPC members;
- Consider increasing communication about the outlook for policy as part of the forecast process;
- A reputable and impartial organisation could arrange meetings with leading researchers and scholars, focused on difficult or controversial issues. This group would set an agenda based on what they think the MPC should hear, including views that challenge prevailing conventional wisdom at the bank
FRAMEWORK FOR PROVIDING LIQUIDITY TO BANKING SYSTEM:
The 148-page review, conducted by former co-CEO of investment bank JPMorgan Bill Winter, recommended changes to remove the stigma for banks facing a liquidity impasse, and clearer roles and better communication between decision-making bodies.
The 22 recommendations include:
- Requiring the Bank governor to seek his deputies' views and to record dissenting views on issues relating to decisions;
- Regular forum at which the governor meets with the Bank's Court and the Chancellor to discuss issues concerning liquidity provision;
- Leaving the authority over any operation intended primarily to influence monetary conditions with the MPC, providing the body with information about relevant implications of other liquidity operations;
- Court should ensure proper communication and coordination channels are in place because a high level of communication and cooperation between the Executive, the MPC and the Financial Policy Committee regarding the central bank's liquidity operations is required.
PROVISION OF EMERGENCY LIQUIDTY ASSISTANCE IN 2008-09:
In the 106-page review, former Bank policymaker Ian Plenderleith examines the BoE's emergency provision of liquidity at the height of the financial crisis in 2008-09 and suggests extending such assistance to non-banks in future crises.
The 28 recommendations include:
- Could act pre-emptively to provide bilateral liquidity support before the need definitively crystallises;
- Needs to be able to identify impending systemic shocks emanating from, or impacting on, non-bank financial institutions;
- May need to give more detailed consideration to how it would accept, value and determine appropriate haircuts for collateral outside that eligible in operations within its published framework;
- Since ELA operations require authorisation by the Chancellor, it would be logical to seek an indemnity for the full amount of ELA from the outset of any operation;
- Set out the principles under which the Bank would contemplate activating its 'lender of last resort' function in its widest sense, particularly in light of the greatly enhanced regulatory and statutory frameworks within which the financial system now operates;
- Some increase in the size of the Bank's capital may be appropriate, to enable the bank to play an effective role in a financial crisis.