Interest rate forecasts, again

I hope someone can correct me here, but I dimly remember a Stanley Fischer chapter in the old Handbook of Monetary Economics, on central bank independence, that carried an entertaining footnote.  In it, Fischer reports that he showed a draft of the chapter to Milton Friedman, who retorted something like ‘central bankers only have 2 objectives, maximising discretion and avoiding public scrutiny’.

Recent discussions about whether the Bank of England should publish interest rate forecasts are going to seem to many like evidence in favour of this Friedman comment [assuming I remembered it properly].

Supposing that the MPC do privately concoct such forecasts, so that monetary policy is coherent, concealing it does have some advantages.  Frequently, MPC members are going to make mistakes interpreting the data, or its significance for policy.  If you don’t disclose your full interest rate forecast, then of course you can quietly change it when you realise your mistake.  Concealing mistakes that even competent analysts would make will seem like a route to enhancing your reputation.

Further, not disclosing a forecast amounts to not laying out all your conclusions for policy open to scrutiny.   This makes it less likely that any conclusions that are contestable or wrong can be shown to be such from the reasoning behind an interest rate vote set out in the public record.   If you don’t tell me that today’s vote for an interest rate rise is part of a crazy plan to get rates up to 7% by 2020, then I can’t detect the full extent of your craziness now.

Developing this thought further takes us back to the premise at the start that there are indeed interest rate forecasts constructed that are not being disclosed.  Perhaps internal discussions are loose enough that MPC members are not forced to arrive at coherent interest rate plans.  There is nothing in the public domain that would contradict surmising that there is simply staff analysis of the data, a collective inflation forecast based on expectations of rates derived from the yield curve, and a free-for-all to pluck interest rate votes and plans out of thin air.  An advantage of not publishing an interest rate forecast, and emphasizing in worried tones the deleterious consequences for communication if you did, is one way to avoid revealing that there are currently no satisfactory procedures for arriving at such forecasts that would look good if exposed to public scrutiny.


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