Taylor questions central forecast role after BOE scenarios

Bank of England's Alan Taylor reflected on the central bank's decision to omit a central forecast from its April 2026 Monetary Policy Report. Speaking at the Monetary Policy Forum, Taylor discussed the historical role and limitations of central bank forecasting, especially amid radical uncertainty.

Beyond the central projection

The Bank of England's April 2026 Monetary Policy Report notably omitted a central forecast, presenting only 'scenarios' conditioned on non-standard judgments.

This decision, which garnered significant attention, mirrors a similar approach taken in May 2020 during the Covid pandemic, when a central projection was replaced by an 'illustrative scenario'.

Alan Taylor, speaking at the Monetary Policy Forum, emphasized that all conditional forecasts are inherently 'what-if' exercises.

He cited the Bank's January 2026 Forecast Evaluation Report, which revealed that much of the post-Covid forecast error, including the 2022 Q4 peak inflation error, stemmed from ex-post changes in conditioning paths for energy prices and global factors following the Russian invasion of Ukraine.

This highlights the inherent limitations of forecasting in the face of unpredictable external shocks.

The forecast's uneasy tension

Taylor explored the MPC's central forecast's historical evolution, highlighting its dual role as both a policy input and output.

He noted that conditioning on the market curve created structural ambiguity, often forcing the MPC into implicit forward guidance.

This approach, Taylor argued, exposed weaknesses when the market curve was dislocated, as it has been a poor predictor of future interest rates over the past two decades.

He cited the 'swoosh' phenomenon since 2024, where the market curve implies a medium-term rate rise significantly above the UK's nominal neutral rate of 3 percent.

This distortion, often due to risk premia, means the forecast can inherit an excessively restrictive implied monetary policy stance, misrepresenting actual underlying expectations.

Navigating radical uncertainty

Taylor's reflection underscores a critical challenge for central banks: communicating policy effectively amidst radical uncertainty.

The shift to scenarios acknowledges the inherent limitations of single-point forecasts, potentially enhancing transparency and managing public expectations more realistically.

This evolution in forecasting methodology is crucial for maintaining credibility in an increasingly volatile economic landscape.