The Bank of England has embarked on its biggest 'fundamental' reform in almost 30 years to the way it formulates and communicates interest rate setting policy.
Claire Lombardelli, deputy governor of the central bank, said these “substantive” changes were “the biggest reforms since the central bank was granted monetary policy independence in 1997”. 
Mr Lombardelli laid out the reforms in a speech at the Bank of England Watchers Conference in London this morning.
The move comes after the central bank failed to predict that inflation would reach a 40-year high of 11.1% in 2022 in the wake of rising energy prices and post-pandemic supply chain shocks. It follows Chairman Ben Bernanke's review commissioned in February.
This drew fierce criticism from politicians and independent economists.
At the time, the former Federal Reserve chairman said the economic software used by the Fed had “serious flaws” and that the Monetary Policy Committee, which sets interest rates, should include “alternative scenarios” in its forecasts. .
This morning, Lombardelli, who will oversee the process, said the bank would change.
Data infrastructure and modeling frameworks Inputs to policy making, including 'the role of forecasts and scenarios and their underlying assumptions' How MPC discussions are structured How data is used to inform MPC policy decisions How banks communicate their 'monetary policy' policy decisions, prospects and risks to both financial markets and the general public.'
Mr. Lombardelli said the Bank would “expand and rebalance” the forecasts of our approach, with “less emphasis on core forecasts.”
She added: “We're going to build the use of scenarios into the process. We're going to loosen the link between forecasting and policy making and its communication.”
She pointed out: “A broader and more systematic use of scenarios allows us to better consider alternative conditioning assumptions and different relationships between economic variables.
“Combined with data analytics, it can help determine the potential for different views on the economy and update judgments about risk and uncertainty over time as evidence evolves.”
The vice president said he would fundamentally update the model the Bank uses, which he acknowledged lags behind the “frontier” systems used by other financial institutions.
She said, “We will develop and leverage a wide range of models that capture the different uncertainties we want to explore.”
Mr. Lombardelli added: “So we are investing in a modeling toolkit and reviewing, updating and extending our existing model suite. This is a multi-year project and we are still designing our modeling strategy.”
The policymaker also said that “clear communication is an important part of ensuring confidence in our work,” and that the fan chart attached to the MPC minutes “doesn't convey uncertainty. He acknowledged that there is a better way.
He added: “Scenarios help us here. They allow us to provide a story about how the economy differs from baseline projections, why and what that means.” he added.
However, the vice president pointed out, “Major changes in external communications will take time.''
She said: “We are taking a root-and-branch approach, and one of the most pressing challenges is to ensure that officials and policy makers can quickly access the right data and understand its lineage and quality. To this end, we are upgrading our metadata and data management model.
“It's a painstaking process. There are approximately 3 million data series to migrate, but it's essential to laying the foundation for the analytical technology on top of it.”
The April Bernanke report made a total of 12 recommendations to the World Bank, which the Bank accepted.
Lombardelli said the Bank will host a conference next summer for “experts, academics, watchers and market participants” to “consider some of the interrelated issues surrounding scenarios, modeling and communication.” .
