LONDON (Reuters) - The Bank of England needs to overhaul its internal structures to address a patchy forecasting record and open up to a broader range of views on the economy, three independent reviews of the central bank’s operations recommended on Friday.
The Bank Governor Mervyn King and his deputies signalled qualified support for a number of the suggestions and pledged to evaluate the recommendations, and some of his former colleagues agreed there was work to be done.
Just five weeks before the announcement of a new governor, the reviews of the BoE’s forecasting capabilities, its liquidity framework and its provision of emergency assistance to banks gave an extensive list for improvements.
One report said that due to the central bank’s “centralised and hierarchical” structure, less senior employees seemed to “filter” recommendations to make them more palatable to senior staff, reducing the range of views and effectiveness.
Former central bankers also stressed the need to allow alternative views room to breathe as part of a close look at the architecture of the central bank, which will swell in size and importance with its new role as the financial watchdog from 2013.
“We need to redouble efforts to challenge the orthodoxies within these institutions,” said former the Bank deputy governor John Gieve.
All three reviews raised the issue of clarifying the roles and cooperation of the rate-setting Monetary Policy Committee, bank watchdog the Prudential Regulation Authority and the new Financial Policy Committee, in charge of securing stability of the financial system as a whole.
The BoE’s oversight body, the Court, launched the three reviews — unique among major central banks — in response to criticism of the bank’s forecasting record as well as its role in the run-up to and during the financial crisis of 2007-08.
The head of Britain’s parliamentary Treasury Committee kept up his call for an even wider review into the central bank’s role during the crisis.
“The decision to commission these reviews fell well short of what was required,” Andrew Tyrie said.
The reviews acknowledged the wide range of changes the central bank had gone through already.
The review of the forecasting record — conducted by former Fed official David Stockton — focused on how to avoid “inertia” that all regular forecasting exercises were prone to.
“An over-arching theme that cuts across many of the options offered below is the objective of increasing the number of ‘entry points’, both internally and externally, for alternative points of view about economic developments and their relation to the forecast and to policy,” Stockton wrote in his report.
The nine policymakers prepare a consensus forecast for the quarterly inflation report, which provides the basis for policy.
Former external policymaker Charles Goodhart rejected the notion that “group think” was more dominant at the Bank then elsewhere.
“If people think that the present governor, or the governor’s position, is that of a Sun King, what do you make of (former U.S. Federal Reserve chairman) Alan Greenspan for god’s sake? Alan Greenspan would then be a Sun King to the power of three,” Goodhart said.
Stockton said the MPC’s recent forecasting performance had been noticeably worse than prior to the crisis, and somewhat worse than that of outside forecasters, persistently over-predicting growth and under-predicting inflation.
Among the 21 suggestions in his 59-page review are the introduction of staff forecasts, more exchange with researchers, improved participation and promotion of highly qualified staff, and an openness about the details of individual forecasts.
The 148-page review of the BoE’s liquidity framework by former co-CEO of JPMorgan Investment bank Bill Winters said the system was in general “robust and broadly fit for purpose”.
Winters suggested ways of removing any remaining stigma for banks seeking liquidity through the discount window facility.
He also stressed that governance of the framework and the coordination between all parties involved could be improved, something the BoE’s Court should ensure.
“It should be informed of the implications for monetary conditions of other liquidity operations, and have the opportunity to express views on such operations if those implications were likely to be material,” he said.
The view chimes with concerns voiced by external policymaker Martin Weale, who has noted that the Funding for Lending Scheme, put in place by the Bank and the chancellor, had an impact on monetary conditions.
Additional reporting by Steve Slater and Olesya Dmitracova, editing by Mike Peacock