Adapting Bank of England Policy to a World of Persistent Economic Shocks

International economic turbulence and a string of extraordinary shocks have significantly altered the environment in which the Bank of England conducts monetary policy, prompting a careful reassessment of how policy is set and communicated. In a recent address, Andrew Bailey, Governor of the Bank of England, outlined how these changes have tested the effectiveness of inflation targeting—long the cornerstone of UK monetary policy—and highlighted the need for continuous evolution in methods and frameworks.

In past decades, central banks navigated relatively mild fluctuations in demand, allowing a single forecast or “central projection” to serve as the key basis for policy. However, the global financial crisis, Brexit, the pandemic, war in Europe, and growing geopolitical tensions have injected greater uncertainty and complexity, with both demand and supply shocks driving economic outcomes. Bailey emphasized that while the inflation targeting framework has remained resilient—the UK’s commitment to its 2% target has not wavered—the unpredictability and scale of recent shocks exposed the limitations of relying too heavily on traditional economic models and one-size-fits-all projections.

To address these challenges, the Bank has implemented significant upgrades to its data and modelling infrastructure, incorporating a wider range of models—including those using machine learning—as well as richer scenario analysis. A key recommendation from an independent review led by former Federal Reserve Chair Ben Bernanke was to improve the way risk and alternative economic scenarios are integrated into monetary policy deliberations. As a result, the Bank has moved to present multiple scenarios alongside a baseline projection, each illustrating how different combinations of shocks could affect growth and inflation. This approach not only deepens internal debate among Monetary Policy Committee members with diverse views but also allows for transparent communication of the uncertainties and complexities facing the economy.

Bailey framed these changes as essential for building resilience as the world becomes less predictable. By shifting from a single “best collective judgement” scenario to a more nuanced communication of risks, the Bank aims to better anchor expectations and reinforce credibility, whatever future economic storms may arise. This evolution marks an important step in ensuring monetary policy remains robust and adaptable amid persistent volatility and change.